Your question boils down to how to value and what are the tax implications of the division of community property
under California and federal law.
1. 401(k). All federally-qualified retirement plans are valued using the "time rule," created by California appellate case law. In its most basic form the number of months of contributions by the employee/participant-spouse during marriage
and before permanent separation
, are divided by the number of total months during which the participant-spouse contributed to the plan, before and during marriage and after permanent separation, before final judgment of dissolution. The ratio result is multiplied by the value of the plan at the date of distribution by the employer, and divided by 2, in order to account for the fact that community property is owned 50/50 by the spouses. That amount is what is awarded to the nonparticipant spouse.
There are no taxes associated with the division of a 401(k) incident to a dissolution of marriage
. The transfer is not taxable (though the proceeds of the division are taxable income). However, in order to effect the division, the court must issue a Qualified Domestic Relations Order (QDRO). The best way to prepare a QDRO is to ask the employer's plan administrator to provide its "form QDRO." Most large plans have such a form, so that they don't have to deal with all sorts of different QDROs issued by different courts.
There are numerous ways to write a division, because different 401(k) plans have different means of distribution (annuity, lump sum, etc.). Most family law
attorneys have QDROs prepared by an attorney who does nothing other than QDROs, because of the complexities of tax law that sometimes interferes. You may want to consider doing similarly -- but, of course, that's entirely your choice.
As you can see, this really is a very difficult question. I would appreciate it if we could deal with it one issue at a time. Given that you are a subscriber, you can rate my answer, and then I can continue -- that way I will receive appropriate compensation for the entire answer.
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