Many people going through a divorce do not have a lot of liquid assets for which to pay attorney’s fees as well as other expenses. Generally, you are unable to access funds in a 401(k) account without incurring taxes on the money receives as well as a penalty, usually at 10% or more. However, during divorce proceedings it may be possible to access these funds to use for legal fees and other expenses, if both parties agree.
Both parties may agree during a divorce to enter a Qualified Domestic Relations Order. This certified, qualified court order is a special order which generally allows for monies to be removed from a 401(k) account both during and after litigation. The availability of a Qualified Domestic Relations Order depends upon the type of plan, as not all plans will use one and not all plans will allow for monies to be withdrawn. The general idea behind a Qualified Domestic Relations Order is that the money is removed, and while the taxes are still assessed to the party who receives the funds, the penalty generally won’t be assessed, in a lot of plans. This make the money available to the parties for use.
The catch to all of this is that generally the monies can only be awarded to the “alternate payee”, or, the person who does not hold the 401(k) account. This person will receive the tax bill for the monies disbursed as well. All of these things have to be taken into consideration before dividing a retirement plan, such as a 401(k) account, but it is an option for those parties going through a divorce who have retirement assets but not a lot of liquid assets or cash.