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How Arizona handles dividing a 401(k) in a divorce

On Behalf of | Jul 28, 2022 | Blog, Divorce

If you’re going through a divorce in Arizona, there can be many things to split up. With that in mind, one of the most important assets in a divorce is a 401(k) account. Typically, companies use 401(k) accounts as retirement plans for their employees. Before you and your ex-spouse divide what’s in this account, there are a few things you should know.

Contact the court

Before you and your former spouse can work on dividing a 401(k), you’ll need to schedule time with a judge because a judge must sign off on what’s known as a Qualified Domestic Relations Order (QDRO). Each party in a divorce must sign this agreement to receive their share of what’s in a 401(k) account.

Understand community property law

Arizona is a community property state. This means that divorcing couples get an equal share of all money added to a 401(k) account during their marriage. This situation can be great for someone who didn’t add much money to this account. But it’s not great for someone who’s depending on this account for retirement.

Distribute the contents of a 401(k) account

After deciding what to do with a 401(k) plan in a divorce, the distribution phase begins. Someone can receive this type of payment in a few ways, including rolling the money into their retirement account or waiting until the account owner retires. It’s also possible to cash out your portion of this payment, but it could incur tax and early withdrawal penalties.

It’s important to note a 401(k) isn’t always evenly divided. If you and your ex-spouse still get along, try to create an independent agreement that leaves both parties walking away satisfied.