What Will Happen to My 401(k) In Divorce?

Retirement Plan Division After Divorce

When considering divorce, one of the first considerations most people have after the discussion of custody of the party’s children is their personal financial status. An important issue that comes up is the division of retirement benefits or a 401(k) in divorce. Property division in divorce is the cause of much stress, especially when retirement accounts are involved.

For many spouses, they may feel as though they sacrificed and worked hard to accrue valuable retirement benefits, and having to split a portion of those benefits with their spouse does not always seem fair. However, it is important to keep in mind that the sacrificing to accrue those benefits was probably shared by both spouses. When this is the case, the sting may not be quite as bad as it otherwise would be had your spouse been a spender and not a saver. Understanding your options can save you from losing the money that you worked hard for all your life, this is where family law experts can help.

Retirement Account Division During Divorce

In most states, retirement accounts acquired during the course of the marriage are considered a joint marital asset. In Community Property states a portion of the retirement account would be deemed community property and subject to a 50/50 split of the value that accrued during the marriage. For people who live in Equitable Distribution states (where a judge determines what is equitable or “fair”), this means that the portion that accrued during the marriage is subject to an equitable division (normally a 50/50 split). This means that even though only one spouse may be contributing to the account, it is still considered the property of both individuals. For instance, the state of Florida mandates an even split of all accounts starting with the date of marriage to the filing of divorce. Still other states dictate that the dividing of retirement accounts gores all the way until the final date of divorce.

Dividing Retirement Cause Fights

Dividing retirement and a 401(k) in divorce can be a major roadblock to a reasonable settlement, which is why some spouses will present alternative settlements in lieu of losing half of their retirement account. In order for this to work, both parties and the court will have to agree to the settlement. If one party is literally walking away with nothing, it is unlikely he or she will agree to anything other than half of the retirement accounts.

Creative Alternatives to Dividing a 401(k) In Divorce

A creative approach to not dividing the retirement accounts during your divorce sometimes means that one of the spouses will agree to give the other spouse a larger portion of the marital assets that are divisible right now, such as a bigger percentage of the proceeds from the sale of a house, or a lump-sum cash payment to buy the other spouse out of the retirement account. In these instances, both parties can be winners, as the buying out of a spouse may mean a large sum to of cash to one spouse now that is needed, while the payor spouse saves thousands of dollars over the course of their retirement by keeping it all to themselves.

Proper Division of Retirement Savings During Divorce

If you have a 401(k) or other type of retirement account, you can rest assured that it will be part of the negotiating process. In most cases, the “plan administrator” (the organization that handles either your pension or your employment related 401(k) or IRA), can provide the information for exactly how the account should be split in the case of divorce (these guidelines are usually in place already). While a lump sum payment is sometimes made, the more common occurrence is the division of the asset with both parties receiving their share at the normal time of payout of the benefits – this could means years in the future.

For a 401(k) or other retirement asset like a pension to be divided during a divorce, a “QDRO” (Qualified Domestic Relations Order) will be needed. This can be drafted by your attorney, should you have one, or drafted by a company that specializes in the drafting of QDRO’s. Bear in mind that QDRO’s are extremely complex, and not having it done properly will result in a forfeiture of a person’s marital share of the retirement benefit. Once drafted and entered by the court post-divorce (or on the same date of divorce), it is also usually necessary for the plan administrator to approve this order before the funds will be distributed.

If the order was issued some time ago, that order may need to be reviewed and amended to reflect current standards. As soon as the QDRO is entered by the court, the spouse who is to receive the benefit in the future should immediately obtain a Certified Court Copy of the signed and court entered QDRO and mail it via Certified Mail to the plan administrator (or the investment broker, depending on the investment). This ensures that they have received your QDRO and that they will contact you if further or corrected information is needed. This is an essential step that needs to be carefully followed to divide a pension or 401(k) in divorce the right way.

Considerations for a Lump Sum Payment

If the other spouse agrees to a lump sum payment instead of electing to receive their marital portion of the retirement or 401(k) accounts, he or she needs to realize that there are more than likely going to be tax penalties and fees associated with that payment. In other words, that large sum of money will be significantly reduced and it may be wiser to allow the funds to sit as originally planned until retirement. In other instances, the distribution can be treated in a way that does not have tax implications.

Keep in mind that if one spouse is forced to liquidate one of their investments to buy the other spouse out from their 401(k) or pension, that spouse will likely be hit with penalties (like a 10% penalty from the sale of an annuity or IRA before retirement age) and even have to pay tax on the amount they withdraw. This is a consideration to take into account when buying a spouse out, as the penalties, tax implications, and the lump sum payment amount might add up to more than what the division via a QDRO otherwise would have been!

Dividing a 401(k) in Divorce is Not Easy

Not many things come easy during a divorce, and that goes for dividing retirement accounts as well. It is always best to view the division from a lens of fairness to the other spouse (whether you are going to be the paying spouse or the receiving spouse) so that the two of you can work together to divide things amicably. There is no bigger waste of money than spending money fighting over money – so understanding how retirement accounts are divided during your divorce is important so that you can avoid throwing good money after bad. This is no time to go it alone, and there is a lot of legal help available to guide people through these difficult processes.