A QDRO for a 401(k) Retirement Plan; and 403(b) and 457 Plans
A 401(k) plan is one of the various forms of a defined contribution plan. Local and state government plans such as 403(b) and 457 plans are similar.
A 401(k) is usually a combination of contributions from an employer as well as the Participant employee. The taxation of the withdrawals varies, because of the variation in the contributions.
Usually the Alternate Payee spouse can receive a portion of the former spouse Participant's 401(k) and take a withdrawal without paying the 10% early withdrawal penalty. If an early distribution is wanted, then it is best to request the plan administrator approve a 401(k) QDRO which provides for the early distribution before the new 401(k) QDRO account is set up.
My advice to a former spouse Alternate Payee who is getting a share of a 401(k) plan pursuant to a QDRO, is that he or she roll it out into their own 401(k) plan. Most existing 401(k) plans will accept rollovers from other 401(k) plans.
Taking control of a 401(k) QDRO account also may provide the opportunity to invest in more secure investments (such as cash money markets, in accordance to the risky stock market.)
Otherwise, roll it out into an IRA. However, be careful about the restrictions on IRA withdrawals. An IRA is a much less flexible retirement tool, as compared to a 401(k) plan. Also, you will likely get stuck with a 10% early withdrawal penalty if you take an early distribution from an IRA plan. So, if you have to take a distribution as soon as a QDRO is processed, take the distribution before you roll any money into an IRA.
The QDRO Must Address How to Handle any Unpaid Loan
One common mistake is not understanding that a QDRO must address how to handle any unpaid 401(k) loan. A QDRO which assigns a percentage such as 50% to the Alternate Payee must specify whether the unpaid loan balance is to be INCLUDED or EXCLUDED in the calculation of the 50%. What this means is that the QDRO has to specify whether the Alternate Payee is to be debited or charged for any of the unpaid loan balance.
Earnings (or Losses as the Case May be) are Allocated Beginning With Division Date
Earnings or losses on the Alternate Payee's new account will be calculated by the plan administrator. Usually the beginning date will be the date of division.
For example, if the date of the Decree is June 1 and the QDRO is not completed until June 25, the plan administrator will keep track of the Alternate Payee's earnings beginning on June 1 and credit those earnings to the Alternate Payee's new account. (Federal law requires the plan to keep records for the past 18 months, and some keep those records for years.)