What You Need to Know about Dividing a 401k during Divorce

Divorce agreementAmong the hardest aspects of ending your marriage, aside from all the other divorce issues, is figuring out who’ll get what, including your 401k. Although dividing a savings or checking account might be simple enough, this isn’t the case with a 401k. Below are some basic guidelines for dividing your 401k when divorcing.

You’ll have to get a court order first

A judge needs to sign a QDRO or Qualified Domestic Relations Order, confirming each party’s legal right to a share of the funds. This is likewise crucial for the spouse who owns the account because he or she won’t have to pay a penalty for early withdrawal or taxes on a distribution from a 401k, explains a prominent divorce lawyer in Nassau County.

You’re bound by state laws

States laws vary concerning the division of property during a divorce. If you live in a community property state, all assets a couple obtains while married are owned jointly by the couple, regardless of who secured them in the first place. In cases like this, both spouses would be entitled to half of the 401k funds, except if a prenuptial agreement states otherwise.

If you live in an equitable distribution state, however, courts would consider various factors such as the financial circumstances of each spouse, how long the marriage lasted, and each spouse’s ability to earn money, when dividing property. This means that division of the 401k could go many ways—50-50, 30-70, 20-80, and so on.

You have three distribution options

If you’re the receiving spouse, you could choose between three options for receiving the money. First, you could roll over the funds into your own (if applicable) retirement account through direct transfer. Second, you could defer making withdrawals until your spouse, the account owner, retires. And third, you could simply cash out your share of the 401k funds.

While state laws dictate how much of a 401k account you and your spouse are entitled to, you could likewise consider mediation, in which you and your spouse work out a plan to divide the 401k. And unless your relationship to your soon-to-be-ex isn’t amicable, working out a plan that would be suitable for both of you could save you time, stress, frustration, and money down the road.