When Arizona couples decide to end their marriage, their retirement funds are often among the largest assets that they own. Going through a divorce is often financially difficult, but people can take action to help protect their financial future and move forward after the split. While Arizona is a community property state, meaning that assets obtained during the marriage belong equally to both parties, judges do have discretion in some cases.
Community property does not involve assets from before the marriage, so a divorce after a short marriage with relatively few years of 401(k) contributions is far less financially rigorous. Ending a lengthy marriage, on the other hand, may mean essentially splitting a 401(k) fund in half, even if the account was accumulated only in one spouse’s name.
Because a 401(k) is a special kind of asset, dividing the account without a penalty requires a specific court order. A Qualified Domestic Relations Order (QDRO) must be signed by a judge and presented to a plan administrator for approval before the funds in the account are distributed. By using a QDRO, both spouses can divide the account without incurring an early withdrawal penalty and related taxes. It is important for people going through a divorce to fully understand the rules of their 401(k) plans. Some plan administrators allow simple percentage divisions, but others require different types of distributions.
In many cases, divorcing spouses can come to an agreement about how to divide their 401(k)s or other retirement funds during the split. In some cases, their respective family law attorneys can be of assistance during these property division negotiations.