How Do We Split A 401 In A Divorce
After 14 years of marriage, my wife and I are divorcing. We dont have many assets, but we have agreed to sell our home and divide the proceeds and will split our debt equally. I have been a stay-at-home parent, but my wife has always worked. As a result of her employment, my wife accumulated a sizeable 401k retirement fund throughout our marriage, but she doesnt agree that Im entitled to any of it. Is this true?
Aside from child custody and parenting time, property division is often a contentious topic in divorce proceedings. Couples who have spent years building a life together now have to tediously sort through property and decide whether it belongs to one or both spouses and how to divide it. While no divorce is easy, this article should provide insight into fundamental property division laws, including retirement assets.
Qualified Domestic Relations Orders
There are three steps involved in splitting a 401 during a divorce. First, the court will order the division to take place in the divorce decree. At that point, you and your attorney will draw up a QDRO, which describes to the plan administrator how it should be split to remain compliant with the Employee Retirement Income Security Act. The judge will sign off on the QDRO, as will the plan administrator, and at that point, the receiving spouse is known as the alternate payee.
The QDRO should contain the name and contact information of the plan participant and the receiving spouse. It will also name the retirement account involved and the dollar amount or percentage to be paid out. There should also be a timeline for the payout and, if multiple payments will take place, when those payments should be made, as well as the amounts of each. Its important that both attorneys are involved in approving the document to make sure it acts in the best interests of both parties.
How Do I Know How To Best Divide The 401k In My Divorce
The best way to divide accounts in your divorce is going to be based on your financial situation. There is no one-size-fits-all approach. It is best to consult with your financial advisor and/or tax professional to determine what is in your best interest. A CDFA , who has specialized training in divorce financial planning can be especially helpful. A CDFA can help you make the right decisions when dividing your 401K and other assets in a divorce.
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What About My Spouses Social Security Or Military Retirement
To be eligible, you must have been married 10 years or longer and meet other requirements. Social Security Spousal Benefits are based on your spouses work history. The amount of spousal benefits may depend on the social security benefits youll receive based on your own work history. Contact your local Social Security Office or visit www.ssa.gov.
Spousal benefits from military retirement are based on how long your spouse was in the service while you were married. If eligible, you can receive payments directly from the service members retired pay. For information, visit www.dfas.mil/garnishment/usfspa/faqs.html.
What Happens To My 401k In A Divorce
Posted by Joshua Wilson | May 06, 2020 | 0 Comments
According to Fidelity Investments, the average balance of a 401 in March 2019 was $103,700. This number is based on more than 16 million 401 account holders in the U.S. The average amount in a 401 is generally tied to age. For 20 to 29 year olds, the average balance was $12,000. For 60 to 69 year olds, the average balance was $195,000.
Money issues are one of the most commonly cited causes of divorce. It is no surprise that in a contested divorce, each spouse may be fighting to get the most money they can, including their share of any retirement savings. How to divide up retirement savings, including a 401 in a divorce can be complicated and may require a separate procedure, known as a QDRO.
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Divorcing Women: The Truth About Your Husband’s 401 And Other Assets
Once your marriage is truly over and divorce proceedings have begun, its time to work out all the financial details. This is the who-gets-what process that most everybody dreads. Divvying up marital property can be stressful under the most amicable circumstances add in some controversy or debate, and it can get downright ugly.
The good news is that with expert help, you might very well emerge in better shape than you may have imagined.
Many divorcing women begin the process under the false impression that they arent entitled to a share of the value of certain assets. But lets make one thing clear right away: When it comes to figuring out what youre entitled to in a divorce settlement, your soon-to-be-ex-husband is not a reliable source of information!
For example, he will be all too happy to have you believe youre not entitled to any of his 401 because it is part of his job, and you have nothing to do with it. Hell be delighted if youre mistakenly under the impression that his stock options cant be divided in the divorce because they come solely from his association with the company and/or he hasnt exercised them yet. And he will be in no hurry to correct you if you think you arent entitled to part of the value of houses, cars, boats, etc., because his is the only name on the title.
Perhaps youre in a similar situation?
Thats about it.
And yes, that includes his 401.
Dividing A Qualified Plan
Qualified plans have protection from seizure or attachment by creditors and lawsuits, but divorce is one of the few exceptions. Divorce and separation decrees allow the attachment of qualified plan assets by the ex-spouse of the plan owner if the spouse uses a QDRO. This decree divides the plan assets between the owner and their current or ex-spouse, or children or other dependents.
This is a tax-free transaction if it is reported correctly to the courts and the IRA custodians. The receiving spouse can roll QDRO assets into their own qualified plan or into a traditional or Roth IRA.
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How Does State Law See Marital Assets
North Carolina uses equitable distribution to divide property, which means the retirement assets arent split down the middle. Instead, the court will look for a fair divide between you and your spouse, depending on some key factors:
- The length of the marriage
- Contributions to one another and the household
- Individual incomes and property
- Child custody and ongoing support
North Carolina sees assets gathered during marriage as marital assets, and those outside marriage as separate property, though there can be exceptions to this broad statement.
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What Do You Need To Divide A 401 In A Divorce
As soon as a court finalizes your divorce, the judge must sign and submit a carefully drawn QDRO to your plan administrator. Once your plan administrator approves the QDRO, you can safely move your exs share without facing an early withdrawal penalty if youre younger than age 59.5.
When assets are getting divided up, the IRS doesnt see the transaction as a withdrawal as long as its done under the direction of a QDRO approved by a plan administrator. QDROs can be complex, so make sure you hire an attorney who specializes in this field. A qualified financial advisor can also serve as a valuable resource if youre negotiating with a spouse on how to split assets without the overarching guidance of the court.
Once an approved QDRO lays out how to divide 401 assets, your ex spouse will have a few options as to how he or she gets her share.
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How Do You Collect Your Share Of Retirement Accounts After Divorce
There isn’t one set rule for collecting your share of retirement accounts in a divorce. For example, if you’re what’s known as the “alternate payee” or pension), you could agree to get a lump-sum payment for your share of the account. Or you could wait until the plan starts paying retirement benefits down the road and get a share of those benefit payments.
In some situations, it might make sense to agree that the spouse whose name is on the retirement plan ) will keep it, while the alternate payee will get additional marital assets to make up for that spouse’s interest in the retirement account. Here’s an easy example: Let’s say the marital portion of your spouse’s 401 is worth $400,000, and the two of your own a mortgage-free home worth the same amount. Rather than hassling with splitting both the retirement account and the value of the house , you could simply agree to a trade-off. Your spouse keeps the 401, and you keep the house.
Of course, this approach is usually more complicated than that example, and it may or may not make sense depending on the specifics of your situation and the assets involved.
Community Versus Equitable Property Division
After you or the judge categorize your property, the next step is to divide it according to your state divorce laws. Depending on where you live, the court may divide your property using one of two distribution models, community property division or equitable property division.
Judges in community property states, like California and Texas, divide marital property equally between the spouses, regardless of who paid for or acquired the property. The theory behind community property distribution is that marriage is an equal partnership, and in divorce, both spouses deserve an equal share of the assets acquired in the marriage.
Only a few of states use the community property distribution process. The remaining states follow an equitable distribution model, meaning the judge will divide property fairly, but not necessarily equally, between the spouses. Judges in an equitable property divorce state consider each spouses financial future, the reason for the divorce , both spouses contributions to the marriage, and other various factors before finalizing property division.
In divorce, stay-at-home-parents often feel less valued than the breadwinning spouse. But courts appreciate the contributions of a non-working parent just as much as the spouse who primarily earned the couples income. Regardless of whether your state follows a community property or equitable property distribution method, the court will acknowledge your efforts as a stay-at-home parent.
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How Can I Keep My Spouse From Cashing Out Retirement Before We Divorce
Many Texas counties have standing orders automatically in effect when a divorce is filed ordering both parties not to withdraw funds from retirement accounts. If your county doesnt have standing orders, ask for a Temporary Restraining Order with the same provisions. A party who disobeys these orders risks being held in contempt of court. If you are thinking about divorce, gather financial information before you file.
If One Spouse Earns Retirement Benefits During A Marriage The Other Spouse Has A Marital Interest In Those Assets In Other Words Retirement Accounts Are Subject To Division Following A Divorce Even If The Account Or 403 Plans Traditional Iras And Roth
However, if any benefits were earned during the marriage, these retirement accounts are considered . Divorcing couples may also agree to split up these accounts or use them strategically in an overall property settlement.
If you are going through a divorce and wondering whether or not to continue contributing to your retirement account, you should consult with your attorney because the answer will depend on your specific situation.
In general, however, you should continue to contribute the same amount and the same percentage that you were contributing during the marriage, unless you are not able to meet your ongoing necessary living expenses. This will ensure that the status quo remains the same and prevent the opposing side from arguing that you stopped contributing in bad faith. Further, if you stop contributing to these accounts, you will still be asked to provide an accounting of the funds that you are saving by stopping the contributions.
Dividing retirement accounts can be a complicated process during a divorce, especially because these assets often make up a substantial portion of the marital assets. However, it is important to keep in mind that as long as the asset is marital, the Court must award an equitable division of property.
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When Do Prenups Expire
If there is no clause or specific stipulation regarding the length of the prenup, there is no expiration date for the lifespan of the prenup. However, the older a prenup the less impact it will have on the division of property at the time of divorce especially if at the time of the prenup the financial circumstances were substantially different.
How Will The Pension Be Affected If My Ex Remarries
If the retirement account is payment for alimony or child support, then any QDRO payments will typically end, just as they would end if the QDRO provides for child support and a child emancipates and leaves home, no longer requiring financial support.
If any portion of the retirement benefits relate to marital asset division, this part will remain intact regardless of marital status .
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When Your Relationship Fades Don’t Let Your Savings Go With It
Divorce takes an emotional and financial toll. You and your soon-to-be ex-spouse have to decide how to divide all your assets, including retirement accounts like your 401s. Finding a solution that both parties can agree on is part of the challenge, but you also have to figure out how to minimize taxes or you’ll lose even more of your savings to the government.
Below, we’ll take a look at what typically happens to 401 assets during a divorce and what steps you can take to hold onto as much of your savings as possible.
If You Haven’t Worked During Your Marriage Are You Entitled To Any Portion Of Your Spouse’s 401
Let’s consider a situation that comes up with great frequency in divorce cases. Suppose that you and your husband have been married for the past twenty-five years. In the course of that twenty-five-year marriage, you have never earned an income. You’ve taken care of the house, your children, supported your husband’s career and done whatever has been asked of you in terms of keeping the home front running smoothly. With that said, however, you have never worked outside the home and have no retirement plans in your name.
However, your husband has worked for the same company for those twenty-five years. He has built his 401 plan up to be worth nearly $1,000,000 over those twenty-five years. It has always been something that has given you great comfort-knowing that there would be a nice chunk of change available to fall back on due to your thrifty ways during your golden years. That peace of mind turned into great unease when your husband filed for divorce from you. Would that money go away now that you are headed for divorce?
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How Do You Get The Money Awarded To You In The Divorce From Your Spouse’s 401 Plan
This is an efficient question that needs to be asked in every divorce where retirement benefits are divided. The process of obtaining the money coming to you occurs at the end of a divorce but cannot be overlooked. It involves the submittal of a Qualified Domestic Relations Order first to the judge of your court to obtain their signature, then to the plan administrator for the 401. These steps can be complicated, and you need to follow a process to get this done correctly. It is advisable to have an attorney’s guidance in this area if for no other reason.
Contact A Peoples Choice
Contact A Peoples Choice for more information about how to divide a 401k in divorce and help with the QDRO process. We can help draft the paperwork needed to divide a 401k account as well as formally join the Plan, if necessary. We offer an easy online interview to get the QDRO process started, making it easy and hassle-free.
It is important not to delay in filing a QDRO when dividing a 401k in a California divorce. Doing so may impact the amount of money a party may receive. It may be important to advice from a financial planner about the tax consequences of dividing a 401k Plan. Request a checklist and/or package of instructions from the plan administrator about their QDRO requirements. Most Plans have specific criteria that must be incorporated into the Qualified Domestic Relations Order for it to be acceptable to the Plan Administrator. Lastly, it is best to sign the QDRO and marital settlement agreement at the same time. At A Peoples Choice, we can prepare your dissolution of marriage paperwork in addition to the QDRO. Contact us for help by calling today at 800-747-2780 or use our convenient online inquiry form.
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