What Happens to Your 401K in a Divorce Settlement?

Any and all funds in the 401(k) accounts during marriage are considered by the courts to be marital property—they are subject to division under the divorce without a prenuptial agreement. The way your 401(k) is split is based upon how all your marital assets are split, monetary accounts or otherwise. If your spouse has a retirement account of similar worth, you both might simply keep your own accounts.

How Are 401(k)s Typically Split During a Divorce?

Funds in your 401(k)s can be split any number of ways, and are as susceptible to division as any other asset. If you were married for a set number of years and contributed money to that retirement account, your spouse might be entitled to a 50% stake of whatever is still in the account. 

What Happens With 401(k)s and Other Retirement Accounts During a Divorce?

Retirement account division is commonly one of the most complex and frustrating aspects of a divorce. Tax implications, unique rules and complicated laws all apply to the division of retirement accounts. During a divorce, you can access your IRA or 401(k) early without being penalized if your spouse is immediately awarded a portion of the account.

Most people withdraw or transfer funds from a 401(k) account during a divorce settlement for a QDRO, or qualified domestic relation order. This court order permits the transfer and distribution of account funds from one ex-spouse to another, called the participant and non-participant.

It’s a tricky process because investment accounts are commonly tied up in stocks, and any changes to the stock market can immediately affect your account’s perceived value. There is extremely specific language used in divorce decrees when dividing up retirement accounts.

Are 401(k), Retirement Assets, or Retirement Benefits Part of Marital Property?

Yes they are, without a prenuptial agreement or any other protective arrangements that prevent your money from being considered a marital asset. Anything you earned or purchased after finalizing your marriage certificate is considered joint marital property, and all of it is subject to the same divorce division based on your state’s laws.

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401(k) Divorce Cash Out

Divorce is expensive, and quite often people need money for a down payment on new living expenses or covering a house while finding a new job after splitting up. Sometimes taking a payment from your ex’s 401(k) as part of the divorce settlement is how you get the cash to move on.

In most cases, taking money from a 401(k) retirement account before you are 59 ½ comes with a penalty fee of 10%. Early withdrawals can be made as part of the settlement, waving this fee under specific rules of the divorce.

What Is a Qualified Domestic Relations Order (QDRO)?

A QDRO is a special order that informs a plan’s administrator on how to pay the spouse their share of benefits under a 401(k) or pension. This allows the non-employee spouse to gain their share of the account. 

To file a QDRO, speak with your trusted divorce lawyer about the assets at stake. Draft and agree upon the details of the QDRO, including the amount of assets. Then, file the QDRO with the appropriate state court. When filing, you need to consider time constraints, delivery methods, and language requirements—these essential details must satisfy both federal and state law, and it is extremely important to communicate with your lawyer throughout the process.

Is It Legal to Cash Out Your 401(k) Before a Divorce?

Not after the divorce begins. After the divorce starts, you are not allowed to dispose of anything considered a marital asset, such as your retirement account. Also, even after emptying the account your spouse could simply ask you for their marital share, which you will still have to pay out. There is also still the 10% penalty fee if you are not of age to cash out the 401(k), and you will owe income tax on the total amount.

Can You Legally Hide 401(k) Assets During a Divorce?

No, it’s illegal to hide any assets during your divorce, including financial assets. However, there aren’t any laws that explicitly state hiding your assets is illegal, though you will be required to present the total truth during divorce proceedings. Hiding a bank account during the proceedings is called perjury and is a crime.

How To Protect Your 401(k) in a Divorce

Several options exist to protect as much of your retirement account as possible during divorce proceedings. You can sell your home, gather evidence that could keep more of the money in your pocket, and make lifestyle changes that ensure that you keep as much of your 401(k) as possible.

Divorce is a negotiation, and you could potentially put something else on the table to satiate your ex, and ensure you keep your retirement account. While you may not be able to stop your ex from getting a portion of your 401(k), you can at least hold on to enough of it to keep putting money in the account after the divorce and make it swell again.

Do You Have to Pay Taxes on a Divorce 401(k) Settlement?

Typically any retirement money in a divorce is non-taxable. There are no tax liabilities or deductions associated with the transfer of funds from one spouse to another, and there are a few things you can do to lower the risk of getting taxed at all. To ensure the total event cannot be taxed, the transfer has to be included in the divorce agreement. Make sure all the specific details are included. Regular tax penalties still apply to any withdrawals or payments that are made from the plan after the completed transfer—the transfer of retirement money from the pursuant to a divorce is the non-taxable event.

There are many ways to settle a 401(k) in a divorce, whether you’re the account holder or the spouse looking for your fair share of the retirement amount. As always, to properly deal with the situation and understand your rights, seek out a professional to help you every step of the way. Your trusted divorce lawyers at Skyview Law know how to help you keep the marital assets that you’ve earned.

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Jarrod Hays is the founder of Skyview Law. He is licensed to practice law in Washington State and the Western District of Washington State Federal Court.

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