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How splitting a 401(k) should be handled

Splitting a 401(k) in a divorce may not be something you planned to do, but it may be necessary, particularly if you or your spouse have spent time paying into a mutual account or have supported one another by putting money into one another's accounts. There are some things you need to know before you do split the account, though, because the division is going to affect you in the long term.

First, know that splitting a 401 (k) requires a court order. Taking money out of a 401(k) can be expensive, and you can be penalized if you do this without a court order. A judge should sign documents including a Qualified Domestic Relations Order to make it possible to split this income. This document states that each spouse has a right to a portion of the 401(k). With this document, you can also make sure you won't have to pay an early withdrawal penalty or taxes on the distribution.

There are a few options for distribution, too. The first option you have is to transfer the money into your own 401(k). This option is good, since you won't have to pay a penalty on the money you receive.

Another option is to wait until retirement to obtain the compensation. If you leave the money in the plan, you can start taking your distributions when you reach 70.5 years old. If you take the distribution sooner, you'll be penalized. You could also choose to take a portion of the account at 59.5 years old, but you could have to pay taxes on the sum and will have a 10 percent early withdrawal penalty.

Source: Smart Asset, "4 Things to Know About Splitting up a 401(k) in a Divorce," Rebecca Lake, accessed June 03, 2016

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