California couples who are getting a divorce will need a document known as a qualified domestic relations order if they have 401(k)s or pension plans to divide. This document, which is usually drafted by an attorney and must be approved by a plan administrator, allows a distribution from these plans in the event of divorce without incurring taxes or penalties.
The information in both the divorce agreement and the QDRO regarding this distribution must be consistent. How the distribution will be made must also be specified. A person can take the distribution directly and owe only regular income tax or roll the amount into an IRA and pay no taxes at the time.
A spouse should not agree to be removed as beneficiary on the retirement account until the divorce is final. Otherwise, if the other spouse dies, that person may not receive any of the retirement account. Both the QDRO and the divorce decree should also specify a percentage of the retirement account that each spouse will receive instead of dollar amounts since the value of the account might change. Finally, people should keep in mind that a 401(k) is protected against bankruptcy while money in an IRA is not.
In California, assets acquired after marriage are usually considered community property. This may also apply to the amount that assets have appreciated since the start of the marriage. Therefore, if only one person builds a retirement account during the marriage, the other person may still be able to claim part of it. This can be an important aspect of financial security for a spouse who has not worked outside the home or whose income has been considerably lower.