How Does My 401 Get Split In Divorce
By Joshua Stern, Divorce and Family Law Attorney
When dissolving a marriage, dividing your retirement account is one of the many financial decisions you and your spouse will make. Like other wealth and assets, your 401 is and will be split during your divorce.
While it can be challenging to determine the exact amounts each spouse will receive, the actual division of a 401 is rather easy. Lets take a closer look at how it works.
What Your Retirement Payout Might Look Like
This topic can often seem confusing. In most states, funds added to retirement accounts during a marriage are marital property, which means that both you and your spouse have a right to them.
If either of you entered the marriage with funds already in a retirement account, that money is often treated as separate property in a divorce, but this may vary by state.
As a rule, only the assets that are deemed marital property are divided in the event of a divorce. Marital property consists of the assets that were contributed during the marriage, along with their earnings.
If your spouse is covered by a defined contribution plan, like a 401 plan, the timing of your payment depends on the plan. Some plans make an immediate lump sum payout, while others pay a lump sum in the future. They also may make periodic payments.
If your spouse has a defined benefit plan, such as a pension plan, on the other hand, you are likely to receive monthly payments starting at your normal retirement age.
It’s important to understand how much you stand to gain from the division of retirement assets as you plan for your future after the divorce. The amount, and whether you have other sources of savings or income, can help you make a retirement budget. It also could help you figure out how much work you may need to do to get back on track with your savings goal.
Risk Of Loss If Assets Sold
You may consider liquidating part of your retirement assets to access cash during your divorce. There is a 10 percent penalty for early withdrawals from a 401 account, which can amount to serious financial losses. You may also lose money if you sell assets when the economy is down. Our attorneys look for alternatives to making inopportune sales of retirement assets. If you need to liquidate part of your account for the benefit of your spouse, we will draft a legal agreement intended to hold your spouse responsible for tax consequences.
Don’t Miss: Do You Pay Taxes On 401k Rollover To Roth Ira
How Many Years Do You Have To Be Married To Get Your Spouse’s 401k
If they added to the 401k during the marriage, you will likely be able to get half of the 401k. But, if it can be tracked, you may only get half of the money they put into the account during the marriage. The longer the marriage is, the more likely the court is to rule against a retirement account being .
What If An Ira Account Is Not Available
When other tax-deferred accounts are not available, you may consider using other financial accounts when considering your desired overall outcome. Using accounts with different tax structures may reduce the costs of additional legal documents, however using different account structures becomes more complex due to the fact that you must consider the after-tax value of each account.
As an example, a dollar in a taxable account is worth a dollar if liquidated and spent. On the other hand, a dollar withdrawn from a 401k is treated as income and is taxed at your ordinary income tax rate. In most cases, this means the dollar is worth less than a dollar after taxes. This does not mean you should avoid considering the substitution of other accounts when considering the cost and complexity of dividing a 401k, it simply means you have a few more things to consider in order to achieve the desired overall division of assets.
Recommended Reading: Can You Make Your Own 401k
How Do We Divide 401s In A Divorce
Often, the marital portion of a 401any funds contributed during the marriageis split equitably. This frequently means a 50/50 split, but it could be divided 60/40, for example, depending on your other assets and what the court determines is fair. There is no preference for the spouse who contributed to the account to keep the majority of it in divorce.
If you, like most people, contributed to a 401 both before and after your marriage, well need to determine what portion of your 401 is marital property and what portion is non-marital property. To do this, our team will look closely at how much you invested prior to marriage, and how much the investment has grown during the marriage. The remainder will be considered marital property.
The non-marital portion of a retirement account can be determined through a variety of methods, which include:
Unfortunately, limited documentation and complex and/or numerous trades can complicate the process of identifying the marital and non-marital portions. Identifying the non-marital share of a 401 can be challenging, especially if the funds have been commingled or transmutedbut our attorneys at Stern Perkoski Mendez are experts at handling these complex financial situations. We can work with you to determine what is marital property and how much of your 401 you get to keep in divorce.
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.
Dont Miss: How To Find My 401k Balance
Also Check: How To Access Your 401k Money
How To Divide Retirement Accounts In A Divorce
On Behalf of Cunningham Law Office | Dec 3, 2020 | Divorce |
As many as 50% of couples in Montana and across the United States will end their marriages. In many cases, retirement assets, such as 401 and IRA accounts, will need to be divided in a final divorce settlement. It is important to understand how to divide these accounts properly to minimize the possibility of triggering an unintended taxable event.
Create A Property Settlement Agreement
If both spouses can agree on all aspects of the property and debt division, a property agreement must be created and presented to the judge. This agreement should list each asset and debt, the value, and the owner. If you have any reservations on the result of the property division, consult an attorney before the agreement is signed.
Recommended Reading: Can I Roll My 401k Into A Brokerage Account
You May Like: How Do I Transfer My 401k To Another Company
Check Your States Law
Your 401 plan is going to be something that is considered during a divorce as it is classed as . This is true if you have been making financial contributions to the account when you have been married. Thus, when you divorce, this means that it will be a monetary asset that can be split between the parties.
Note that there are going to be many factors that decide on how much of a 401 plan a spouse receives. It will not always be 50 percent, and it can depend on how long you are married and even how much you have contributed.
For example, you will need to consider whether you live in a community property state. In this case, it is likely that your 401 plan will be split equally between you and your partner.
This goes for any property and assets that are part of the marriage.
However, if you live in a state that favors equitable distribution, a judge is going to look at the circumstances. They will not always favor a 50 percent split, and they will reach an outcome that is fair and equitable for the situation.
Distribution Options Are Limited
Spouses on the receiving end of a 401 distribution after a divorce have three basic options for getting the money. The first option is to roll the assets over into your own qualified retirement plan by requesting a direct transfer. This allows you to avoid having to pay a penalty on the money.
Another option is to defer taking a distribution until the account owner retires. If you decide to wait, you could either choose to take regular payments or get a lump sum. If you leave the money in the plan, youll have to begin taking required minimum distributions starting at age 70.5 to avoid a penalty.
You can cash out your portion of the balance as well. This gives you the greatest access to money, but it can be costly. If you havent reached age 59.5 at the time of the payout, you might have to pay income taxes on it along with a 10% early withdrawal penalty.
Don’t Miss: How Can I Start A 401k
State Law Dictates Division Rules
States have different laws regarding the treatment of property acquired prior to and during a marriage. Things are different in California than in Texas or North Carolina, so knowing relevant state law is key. In equitable distribution states, the court looks at factors like each spouses financial situation, ability to earn income and the length of the marriage in order to divide a couples assets in a manner thats fair to both parties. That doesnt mean, however, that its an automatic 50-50 split.
In a community property state, on the other hand, any assets gained during the marriage are considered to be owned jointly by both spouses, regardless of who was actually responsible for securing them. In that case, each of you would usually be entitled to half of the money held in a 401. There are some exceptions, including sometimes when a prenuptial agreement is in place.
Should You Cash Out A 401k In A Divorce
Am I suggesting that retirement plans are a good source of cash when going through a divorce? Let me be clear. No, I am not suggesting that at all. I simply want to share that if you have a cash need and it makes the most sense to take it from a retirement account, the IRS does allow you to take money from a 401K without penalty.
Keep in mind, though, if the funds are in a pre-tax account, they will still be taxable when withdrawn. The plan administrator will withhold taxes when the distribution is made. However, it may not be enough to cover your tax liability, depending on your marginal tax rate, so youll want to plan accordingly.
Read Also: How To Get Money From Your 401k
Change The Beneficiary On Your 401
Some divorcing couples will argue for months about who deserves all or some of the 401 plan. However, the winning party might forget to change the name of the beneficiary.
Many people want to protect their spouses if something happens to them. They usually do this by adding their spouses name as a beneficiary to their retirement accounts.
If you get divorced and forget to change the beneficiary on your 401, your ex could receive the funds when you die even though youre no longer married. You should take immediate action to take your spouses name off the account. Its as simple as calling the plan administrator and completing a new beneficiary designation form.
You could add a childs name instead, or a close relative you want to access the asset once you pass away. However, the decision to remove your exs name is entirely up to you. If you still want them to be taken care of when youre gone, you can keep them as a beneficiary on the account.
What If Retirement Funds Were Acquired Prior To Marriage
If retirement or investment funds were acquired prior to marriage, then the original or principal amount may be considered the entire property of the spouse who originally made the investment. If the court finds that those funds are non-marital property, then one spouse can keep 100% of the amount. However, any net gains or interest that is accrued during the marriage is likely to be considered marital property to be divided in the QDRO.
Also Check: How To Do A Roth Conversion From 401k
What Happens To 401k Contributions Before Marriage
If you have a 401 plan before you get married, the money that was invested will not be part of a divorce. It is not classed as marital property since you were not together as a couple. This means that the money still belongs to you, and you are its owner. Nobody else is going to be able to touch this money or use it in any way.
Thus, your partner is not going to be entitled to share of a 401 plan that was started before the marriage. This is going to be all yours in a divorce proceeding. They can only claim what has been put into this account since they have been legally married to you.
For example, imagine having $10,000 as part of a 401 plan. About $5,000 of this money was contributed when you were single, and $4,000 was added to the plan after you got married. The first $5,000 is going to be your property upon divorce. But, the $4,000 may be split between you and your partner. So, you might only end up with $7,000 after proceedings if there is no prior agreement in place.
How Is A 401k Split In Divorce
There are a few ways 401ks and other retirement accounts can be split in divorce. If there are two or more accounts that could be split to similar values, each party could get their own account. Or you can split a 401k into two accounts, but you need a court order to do this. The final option is to allow one person to keep the 401k and let the other party have something of equal value. This option can be unbalanced though because you also have to think of the future gains of the 401k.
Don’t Miss: How Can I Take A Loan From My 401k
A Note About Cashing Out
In a divorce, you are legally required to share all financial information with your divorcing spouse. This makes failing to do so the crime of perjury , and the judge will take this fact into careful consideration when determining the division of your marital property. In other words, cheating the numbers is almost certain to work against you. All of the following attempts to decrease your financial burden during divorce can be deemed a form of perjury by the court:
- Cashing out your IRA in an attempt to keep the funds for yourself
- Selling off or gifting assets
- Failing to be forthcoming with financial information
Dividing An Ira: Transfer Incident
If you specified that your IRA division is to be treated as a transfer incident to divorce in your agreement, no tax will be assessed on the separation transaction. The movement of funds may be classified as either a transfer or a rollover by the IRA custodian, depending on the circumstances of the division and how the decree is worded.
The recipient will take legal ownership of the assets when the transfer is complete and then assume sole total responsibility for the tax consequences of any future transactions or distributions. This means that if you are going to give half of your IRA to your soon-to-be ex-spouse in the form of a properly labeled transfer incident, they will have to pay the tax on any distributions they take out of the account after they receive the funds. You will not owe tax on the assets that were sent to them because you followed the IRS rules for transfer incidents.
If, however, you failed to adequately label your division as such, you will owe both tax and an early withdrawal penalty on the entire amount that your ex-spouse received. In order to avoid this, be sure to clearly list both the division percentage breakdown and the dollar amount of IRA assets transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.
Read Also: What Happens To My 401k When I Quit My Job
Negotiating In A Divorce
It is possible to discuss and negotiate the 401 plan with your partner during a divorce. For example, if you are using mediation, this can be a topic that you can discuss. Perhaps there is an agreement you can make when it comes to the 401 plan. Your partner may understand and agree that this is your money. You could make a deal regarding something else.
-
Offer Another Asset
For example, you may be able to talk to your partner and negotiate that they do not get any money from the 401 plan. Instead, they can get another asset in the divorce. If this is the case, then you should make sure that this exchange is legally binding and in writing. Namely, it should be part of a divorce settlement. Alternatively, it can be in agreement documents that are signed by both parties. This way, they cannot claim the money later on.
-
Need for Mediation
One thing that you cannot do is tell your partner that they cannot touch your 401 plan. This is going to cause animosity during meditation proceedings. This should be a time for you to negotiate and be fair. Mediation can be a successful process when you make just decisions with your partner. You should not demand that they leave your 401 plan alone, as this will not have the outcome you are looking for.
