Typically, because you’re going through a divorce, there’s an exception in the tax code that allows you to divide a retirement account with what’s called a Qualified Domestic Relations Order (QDRO). If you do it correctly with a QDRO on a 401(k) plan, or there’s special forms if you’re going to divide a PERS plan, they have their own special forms. It’s a little different but similar to a QDRO and the same for a pension. If you use these required documents, then you will not have any tax implications by taking part of the money from a retirement account from one spouse and putting it into an account for the other spouse. Or you can’t necessarily see an account if it’s a defined benefit plan, giving a benefit to the other spouse that they’re entitled to receive upon retirement, so there wouldn’t be any taxes or penalties.
On occasion there are clients that just wants the cash. They just want the money. It’s not a very smart idea, but you can cash out a 401(k)-type account and pay income tax on it and a 10% penalty. There’s one kind of twist that you can sometimes do where you can QDRO a 401(k) account and you won’t have to pay the 10% penalty, but you’ll still pay income tax on it if you cash it out before retirement age.
Laura Schantz is a family law attorney and mediator practicing in Beaverton, Oregon. To learn more about Laura Schantz and her firm, Schantz Law P.C., visit www.oregondivorceattorney.com.