How Are 401(k) Assets Split in a Divorce?

When couples divorce, dividing retirement savings can be one of the more complex steps in the process. Understanding how to split a 401(k) in divorce often requires a specific court order called a Qualified Domestic Relations Order (QDRO), which directs the plan administrator on how to divide the account. Depending on state laws and the length of the marriage, the division may not be a straightforward 50/50 split. Factors such as contributions made before marriage or employer matches may also influence the outcome.

A financial advisor can also serve as a valuable resource as you split property and financials in a divorce. Find an advisor who serves your area.

How Is a 401(k) Split in a Divorce?

This depends largely on laws in the state where the divorce is finalized. Some states follow “community property” standards. This means your 401(k) is seen as joint property that both you and your spouse own. In such a case, the court generally splits contributions to the plan equally among both spouses.

Most states, however, follow “equitable distribution” rules. This basically means the judge splits the 401(k) assets as he or she deems fair. This doesn’t always mean an even 50/50 split. First, the judge distinguishes between “marital property” and “separate property.” When it comes to 401(k) plans, contributions each spouse made to a 401(k) plan after they got married cover the “marital portion.”

The judge then proceeds with how to divide up the “marital” portion. The court considers several factors including the financial situation of both spouses, the account balance and length of the marriage.

Nonetheless, you don’t need a court to make this decision. You and your spouse can negotiate and decide on your own how to split up a 401(k) in a divorce. Just make sure you both clearly explain the decision in your “marital settlement agreement” or “divorce settlement” drafted with the help of the attorneys involved.

Whether a couple or a court decides on how to divide 401(k) assets, the next crucial step would be drafting a QDRO. The judge must sign this critical document before sending it to the plan administrator. The plan administrator must then approve it before money can be safely moved out of your 401(k).

This is why, before you even begin negotiating the splitting of 401(k) assets or seeking legal assistance, you must learn your plan’s rules.

Know 401(k) Plan Administrator Rules Regarding Divorce

401(k) plan administrators must follow strict guidelines in order to comply with the Employee Retirement Income Security Act (ERISA). Thus, plan administrators follow specific rules regarding treatment of 401(k) assets following a divorce. Some, for example, divide portions by percentages. Others split it in “shares.” In addition, some plans won’t allow your spouse to take distributions from the plan until you retire.

So it’s important you review your plan rules and share them with any attorney, CPA or financial advisor you’re working with during the divorce proceedings.

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

As soon as a court finalizes your divorce, the judge must sign and submit a carefully drawn QDRO to your plan administrator. Once your plan administrator approves the QDRO, you can safely move your ex’s share without facing an early withdrawal penalty if you’re younger than age 59 ½.

When assets are getting divided up, the IRS doesn’t see the transaction as a withdrawal as long as it’s done under the direction of a QDRO approved by a plan administrator. QDROs can be complex, so make sure you hire an attorney who specializes in this field. A qualified financial advisor can also serve as a valuable resource if you’re negotiating with a spouse on how to split assets without the overarching guidance of the court.

Once an approved QDRO lays out how to divide 401(k) assets, your ex-spouse will have a few options as to how he or she gets her share.

Direct or Indirect Rollover to an IRA

Your ex-spouse can initiate a direct rollover of her proper share of your 401(k) into a personal IRA. The transfer itself won’t trigger any taxes on your part or that of your ex. But if your ex makes a withdrawal before reaching age 59 ½, he or she would generally owe a 10% early withdrawal penalty in addition to regular income tax.

Keep in mind, however, that these rules apply to direct rollovers. This means a direct plan-to-plan rollover. So, your ex may want to open an IRA before the plan administrator approves the QDRO. An IRA can be opened at most banks and investment firms.

With an indirect rollover, however, the plan administrator sends a check to your ex-spouse in the amount of his or her proper share. Your ex then generally has 60 days to deposit the funds in another plan without facing significant tax penalties.

Cash Out

If the approved QDRO permits it, the IRS allows your ex to take a lump-sum distribution without facing the 10% tax penalty even if he or she is younger than age 59 ½. But because the plan was funded with pre-tax dollars, your ex would still owe the appropriate federal income tax on distributions.

Defer Payments Until Account Owner Retires

If your plan administrator allows it, your ex can leave his or her share invested in the plan and wait until you retire to begin taking distributions. This might make sense if your ex is younger than 59 ½ and doesn’t immediately need the funds. However, he or she would need to start taking required minimum distributions (RMDs) upon reaching age 73 (or 75 if born in 1960 or later).

Bottom Line

Dividing a 401(k) in divorce blends legal requirements, financial planning, and the specific rules of each retirement plan. Court orders like QDROs establish the framework for a fair split, but couples also have room to negotiate terms that work for their circumstances. From direct rollovers to cash distributions, multiple options exist for handling an ex-spouse’s share once the plan administrator approves the transfer. By understanding the procedures and potential outcomes, divorcing spouses can approach this process with greater clarity about how their retirement savings may ultimately be shared.

Tips on Avoiding Costly Mistakes in a Divorce

Some financial advisors, including certified divorce financial analysts (CDFA), specialize in helping people navigate the financial realities of divorce. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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