Because of California’s laws, a Californian who has a 401(k) through their employer may have to divide it equally with their spouse.
Basically, that part of the 401(k) that is legally community property belongs to both spouses equally. Unless the spouses make other arrangements through negotiation, the court will divide the balance of the 401(k) 50/50.
It is possible that all or part of the balance is separate property and thus will belong to the account holder. In the case of a retirement plan, for example, separate property will include that part of the plan a person held prior to their marriage.
The account owner also keeps outright amounts deposited after the couple’s separation.
Courts will also treat retirement pensions as community property
On a related point, many residents of Newport Beach and the surrounding Orange County communities may have retirement pensions through their employers. These also get divided 50/50 if they are community property.
Government employees should pay particular attention to this rule since they often have pensions as part of their benefits package. They should also be aware that unlike a 401(k) plan, it may be difficult to determine a present-day cash value of a pension without the help of an expert.
How will the court divide my retirement plan?
In some cases, the couple may be able to work out an arrangement where one spouse buys out the other spouse’s share of a retirement plan. They may do so with a cash payment by trading other property or by taking on additional debt.
If a buyout is not an option, once the court divides the plan, one of the spouse’s attorneys will usually be the one to prepare a Qualified Domestic Relations Order, or QDRO.
After the judge signs it, the court or the attorneys will send it to the administrator of the retirement plan. The QDRO must meet IRS rules and regulations for the administrator to accept it.
Properly prepared, the QDRO will give detailed instructions on how to divide the plan, which the plan’s administrator will follow. If the process goes smoothly, there should be no tax penalties imposed on either spouse.