If you withdraw the amount of money from your 401k that you agree upon during a divorce, you could end up dealing with more than you bargained for in the form of income taxes and early withdrawal fees.
Instead, consider looking into a qualified domestic relations order, which can allow you to avoid these early withdrawal fees.
What is a QDRO?
The U.S. Department of Labor discusses matters of 401k accounts, including handling them during a divorce. They take a look at qualified domestic relations orders or QDROs. It allows you to authorize the spouse of the account owner as an authorized account payee. In short, the spouse can then directly receive money from the 401k. This way, the owner of the account does not need to make withdrawals in the first place.
Steps of a QDRO
The plan administrator must first review and then approve the QDRO. In this order, you must also include any and all distributions planned, and the amount therein. You can set this amount in either a percent of the value’s funds or in a direct dollar value.
In addition, you can also choose different ways to make payments. You may either have a payment made in one lump sum or make multiple distributions over time.
In this situation, it relieves the burden of taxation on the account owner, too. As the spouse receives money directly, they must then pay the associated income taxes on the share they receive. It is a good way to ensure the spouse gets their share of the 401k while also keeping additional costs to a minimum.