How is a 401(k) handled during a divorce?
In Illinois, it is possible for your 401(K) to be subject to an equitable division. The court makes the decision on how the 401(K) is divided among both spouses after divorce.
Understanding the Role of a Qualified Domestic Relations Order
During property division proceedings, the court typically issues a Qualified Domestic Relations Order. This order authorizes your 401(K)-plan sponsor to make a disbursement to an alternate payee (who, in this case, would be your ex-spouse). The details of that disbursement may vary. The court may simply roll it over into your ex-spouse’s already existing retirement account, or it may divide your account into two separate funds (with each of you than gaining authority over your respective accounts).
Should either you or your ex-wife choose to do so, you may also cash out your portion of the 401(k). Typically, this will net an early withdrawal penalty, yet divorce cases allow for early withdrawals without penalty (whoever chooses to do this, however, must pay income tax on the disbursement).