For 401ks and pensions, a Qualified Domestic Relations Order (QDRO) is used to divide the account upon a divorce in a non-taxable method. It must be signed by a judge in accordance to the agreement or ruling in a divorce case. It is filed with the plan administrator of the plan. The account may be split so that each party has his/her own account and can direct the investments for themselves. They also don’t have to depend on the ex-spouse for payment of their share.
An IRA is divided via a trustee to trustee transfer. Instructions are given to the administrator of the IRA about how to divide the IRA. It is important that it not be cashed out to one of the individuals because that would make the distribution taxable.
A pension is also called a defined benefit plan. A defined benefit pension is where the benefit is set, based on some criteria of years worked and age. In order to value a defined benefit pension, you must have an actuary evaluate the plan to evaluate what the future stream of benefits is worth today.
An employer sponsored 401k is also called a defined contribution plan. Your employer’s plan sets a matching and/or profit-sharing formula. You make contributions, and at the date of retirement, your payout to you is not a certain amount per month. The employer’s plan makes no promise of a guaranteed amount. This type of plan also requires a QDRO at the time of the divorce.
If you don’t do a QDRO at the time of the divorce and file it with the plan administrator, your ex could withdraw all of the money because the plan administrator would have no way of knowing that you were entitled to part of it. Also, even if that hasn’t happened, as companies come and go, get sold or have mergers, it is difficult to track down where the funds are being held without the assistance of a willing ex-spouse. Or, if the ex-spouse dies, the money may be passed through probate without you getting your share.