5 Things to Know About Splitting Up a 401(k) in a Divorce

Divorce can be an overwhelming and challenging process, made more complicated if spouses have sizable retirement savings they want to divide. Splitting a 401(k) in your divorce involves paperwork, fees, taxes, and other considerations. It also requires detailed financial planning, considering how much money each spouse has contributed to the plan and any investment returns. If you are going through a divorce and need to decide what should happen with your 401(k), there are essential things you should know before making any decisions. This article will explain all the factors you need to consider when splitting up a 401(k) in a divorce so that both parties get their fair share of assets.

Different Types of Retirement Accounts

Before we cover how 401ks are split in a divorce, let's look over the other types of retirement accounts.

Traditional IRAs

Traditional IRAs are tax-deferred retirement accounts funded by employee or self-employment income.

Roth IRAs

Roth IRAs are retirement vehicles where posttax contributions can be made, earnings grow tax-free after five years, and there are no taxes on distributions upon retirement.

401(k) Plan

401(k) plans are employer-sponsored accounts that allow employees to save for retirement with pretax salary deductions.

SEP IRA or SIMPLE IRA

Employers offer these retirement accounts. They are less expensive and have higher contribution limits than traditional IRAs.

5 Things to Know About Splitting Up a 401(k) in a Divorce

While you might think splitting up your 401(k) in your divorce is simple, some things complicate it.

1. State Laws Dictate Retirement Plan Division Rules

When splitting a 401(k) between two spouses during a divorce, the answer depends greatly upon state laws and standards. States that adhere to “community property” rules are likely to split contributions to the plan equally between spouses as it is considered joint property owned by both parties. In contrast, states that observe “equitable distribution” rules have judges who decide how to split 401(k) assets among both individuals fairly.

Whether the divorce is uncontested or contested, a divorce mediation lawyer can help. This can help ensure that each spouse gets his or her fair share of the asset and walks away from the proceedings without feeling overly burdened financially. Depending on state laws, any pre-divorce contributions made by one spouse may not be considered part of the marital estate and would remain only in possession of their former partner.

2. You Need a Court Order to Divide a 401(k)

When a couple gets divorced, an essential part of the process is deciding how to divide their assets. This includes money held in retirement accounts such as 401(k)s and IRAs. You need a court order known as a Qualified Domestic Relations Order (QDRO) to do this legally. This court-approved document outlines each spouse's right to a portion of the money. It is necessary for the party that owns the account, so they don't have to pay taxes or an early withdrawal penalty on any distributions from the plan.

3. Distribution Options Are Limited

Spouses receiving a 401(k) distribution after a divorce have three main options for how to receive the money.

Direct Transfer

The first option is a direct transfer into their qualified retirement plan, which can be done without a penalty.

Wait to Transfer Until Retirement Age

Alternatively, they could defer taking the distribution until retirement age, when they would have the choice of either regular withdrawals or getting a lump sum.

RMDs

Finally, they could leave the money in the plan and begin taking required minimum distributions (RMDs) at age 70.5 to avoid consequences.

Each option has distinct advantages and tradeoffs associated with it. Hiring a divorce mediation lawyer can help you understand the best options for your unique divorce.

4. 401(k) Plan Administrators Have Strict Rules To Follow

Understanding the rules and regulations that 401(k) plan administrators must adhere to is essential to handling a divorce settlement. The Employee Retirement Income Security Act (ERISA) governs how 401(k) plans are managed and distributed, mainly how they should be treated during a divorce. Plan administrators, therefore, have specific protocols laid out for them about the splitting of assets following a divorce. This could involve splitting portions by percentages or in “shares” format, with only one spouse allowed taking distributions before retirement at some plans.

Regardless, it is essential for those going through a divorce to acquaint themselves with the details associated with their plan's rules.

5. You Can Work Out Your Own Agreement

Managing your divorce process by creating a fair division of your retirement assets on your own can often be financially and emotionally beneficial. It's important to familiarize yourself with the laws determining how much a spouse is entitled to in retirement assets in the state where you're divorcing, so you can ensure the division you agree upon falls within those parameters. In many cases, hiring a divorce mediation lawyer can help you avoid a lengthy and costly divorce.

Contact a Divorce Mediation Lawyer Today for Help Dividing Your 401(k) in Your Divorce

A Divorce Mediation Lawyer is a professional who assists in divorces, helping both spouses reach an agreement about the divorce terms without going to court. We help couples resolve legal issues regarding:

• child custody
• spousal support
• and asset division.

Contact Bullock Law today if you want to avoid court and costs.

FAQs

What Happens When Both Spouses Have 401(k) Plans and/or IRAs?

When both spouses have 401(k) plans and/or IRAs in a divorce, the court may consider them as marital assets to be split between the parties. The court may also order that all or part of one spouse’s retirement account be transferred to the other spouse as part of a property settlement. This transfer must be done through an appropriate process, such as a Qualified Domestic Relations Order.

What is a Qualified Domestic Relations Order?

A Qualified Domestic Relations Order (QDRO) is a court order that dictates how pension, retirement, or other marital assets should be divided in the event of a divorce. QDROs are also used to transfer funds from one party's 401k or IRA plan to another without incurring income tax penalties.

How Do You Manage Beneficiary Designations Once a Divorce is Finalized?

Once a divorce is finalized, updating and managing beneficiary designations is essential. This update should be done through the account provider and can be done by either updating existing documents or creating new ones. It is also wise to seek legal advice from a lawyer regarding any changes that need to be made.

What Do You Need to Divide a 401(k) in a Divorce?

When dividing a 401(k) in a divorce, you must request a Qualified Domestic Relations Order (QDRO) from the court. This official document splits the account and outlines how much each party is to receive. You will also need the contact information for your 401(k) plan administrator.

What If Your Spouse Hides a 401(k) During Divorce?

When spouses exchange detailed financial declarations during divorce, they typically affirm under penalty of perjury that all information provided is complete and accurate to the best of their knowledge. If a spouse deliberately omitted an asset from these statements, they could be charged with perjury. Furthermore, the judge might even order to reopen of your case to accommodate this newly discovered asset. For this reason, spouses need to be honest about their finances and avoid hiding any assets during divorce proceedings.

Can a Divorced Spouse Collect on Their Ex-Spouse's Social Security Benefits?

Divorcees may be able to collect Social Security benefits based on their ex-spouse’s earning record. To qualify for this benefit, the applicant must not have remarried and must be at least 62. The marriage must have lasted ten years or more for the application to be valid. The divorced spouse will receive some of their former partner's benefits upon approval. This amount will not reduce the other spouse's benefit in any way.

What Is a 401(k) Divorce Cash Out?

A 401(k) divorce cash out is a process that allows a participant in an employer-sponsored retirement plan (such as a 401(k)) to withdraw funds during and after a divorce settlement. This type of withdrawal is typically only available if the couple has signed and filed a Qualified Domestic Relations Order (QDRO). Funds withdrawn as part of a 401(k) divorce cash out are taxable, plus could be subject to an early withdrawal penalty unless certain exceptions apply.

How a Divorce Mediation Lawyer Can Help You

A divorce mediation lawyer can provide couples with an alternative to the traditional court process, which can be expensive, lengthy, and emotionally draining. With the assistance of a trained divorce mediation lawyer, couples can come to a mutual agreement regarding the

• division of property and assets
• spousal support
• parenting arrangements

Clear and Effective Communication

The mediator will also help keep communication between the two parties productive instead of devolving into arguments or clashes. A mediation lawyer's experience can be beneficial to help facilitate compromises on contentious issues like child custody or alimony payments. In addition to helping achieve practical outcomes regarding the division of assets and expenses/debts, they should also make sure that all agreements take into account the emotional needs of both spouses too.

Contact Bullock Law Today

If you need a mediation lawyer for your divorce, we can help. Contact Bullock Law today.