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Originally Posted On: https://gillespieshields.com/blog/401k-divorce/
How to Protect Your 401(k) During a Divorce
During a divorce, all marital property is subject to division between the spouses, including retirement accounts and 401(k) accounts. When spouses cannot come to an agreement during the property division process, the results can be costly and may even provide disproportionate access to retirement funds and other assets to the detriment of one spouse. Even amicable divorces generally divide 401(k) accounts between the spouses.
However, with some legal foresight, it is possible to protect your funds during a divorce. Learn how you can work with a divorce attorney to ensure you can still benefit from your 401(k) after divorce.
401(k) and Divorce
You’ve worked hard and spent a good part of your life building up your retirement savings so that you can comfortably retire in the future. The possibility of losing half those funds during divorce can seem like a nightmare, but for too many divorcing couples, it is a harsh reality. Fortunately, you do not need to resign yourself to losing your retirement in your divorce.
Funds within a 401(k) may be split between spouses, or one spouse may keep the entire 401(k) by giving up other assets. Alternatively, you can protect your retirement accounts from the beginning with a marital agreement. A skilled divorce lawyer can work with you to draft a plan to help you protect your retirement funds.
Are My Retirement Assets, Benefits and 401(k) Part of Marital Property?
Typically, retirement assets or benefits, including a 401(k), are considered marital property. Even if you are the sole contributor to your individual 401(k) account, it is still considered community property because you earned money and contributed it during the course of your marriage. A portion of the savings would be divided in a divorce settlement.
This is only the case, however, if you have contributed to your 401(k) during the time you were married. For example, if you were the sole owner of a 401(k) account before marriage and then did not contribute further to that account, that account would remain separate property and would not be divided as part of the marital property. This same rule applies to an IRA.
In some situations, such as in the case of an IRA, a spouse’s name can be added to a separate account after marriage. A court may consider this case as a commingled asset, which means that a combination of premarital and marital funds were used to build the account. It is the court’s decision how much of that commingled account will be split.
Pensions are another kind of asset that can be considered marital property. Pensions follow the same idea as retirement accounts, as any contribution that you added to the account before the marriage is separate property, and all contributions after marriage are marital property. Yet, every state has different rules as to how pensions may be paid out. Some pensions stipulate that the survivor of a spouse, even an ex-spouse, may receive pension benefits.
Rollovers and Commingling of Retirement Assets
Sometimes, an individual decides to use a rollover as a way of transferring money from one kind of account into another. For example, before getting married, a person may choose to move funds from his or her 401(k) into an IRA without making any further contributions after getting married. In that instance, that rollover IRA would not be considered part of the assets to be split as marital property in a divorce.
However, as mentioned, if contributions were made after the marriage, that part of those funds would be subject to distribution. If a spouse’s name has been added to the IRA within the timeframe that the couple was married, then that would be considered a commingled asset and, therefore, would be divided between the couple.
How to Protect Your 401(k) in a Divorce
As mentioned, there are multiple legal options for protecting your 401(k) during divorce.
Create a Prenuptial Agreement
The most proactive and effective way to protect your 401(k) savings is by creating a prenuptial agreement before your marriage. Within the prenuptial agreement, there should be a clause that states precisely how the division of marital property, especially retirement savings and other assets, should be handled in the event of divorce. Of course, many couples decide to forgo creating a prenuptial agreement as they do not anticipate getting a divorce as they enter into a marriage relationship. If you chose not to draft a prenuptial agreement, you can still consider creating a post-nuptial agreement with the same clause.
Negotiation and QDRO
If no prenuptial agreement has been created, but you still want to protect your 401(k) as you are dissolving a marriage, it is still possible to do so. You can employ strategies during the negotiation process to discuss how to divide marital property, including 401(k) savings, with your spouse.
The first step of handling a 401(k) distribution in a divorce is to monitor the value of the 401(k) while you are still married. Because it can be divided in the divorce, the current value of the account is taken into account during the negotiation process.
Then, you will need a qualified domestic relations order (QDRO), a type of legal decree that ensures your 401(k) conforms to federal pension plan laws that govern contribution plans so that the plan qualifies for beneficial tax implications. At this time, you can clearly outline how the assets are to be divided. This court order gives your spouse permission to receive funds from your 401(k) account if necessary and prevents tax penalties for early withdrawals as you move the funds.
After the necessary QDRO is complete, your 401(k) can then be divided as part of the marital assets. Keep in mind that the rules for dividing marital property are determined by the state. Arizona is considered a community property state, and all marital property must be divided equitably. These same principles apply when dividing a 401(k).
It is important to note that the funds you contributed to your retirement savings before marriage are yours to retain, as these funds are considered separate property (property that was owned by one spouse before marriage). However, all contributions to the account made during the marriage are subject to division unless protected by a marital agreement.
Determining the Value of Your 401(k)
To find the value of your 401(k), contact your plan administrator. Alternatively, you may review your yearly statement to assess the current estimated value. You may even choose to hire an actuary who can help you determine which funds are subject to property division and which you contributed before the marriage.
Your attorney can help you consult with a qualified actuary. Having a professional configure these amounts can help you achieve a fair and equitable divorce settlement. It can also reduce the chances of you or your spouse questioning the fairness of the division of the 401(k).
After an actuary determines the value of both community and separate property, the next steps should be easier. An attorney can present the funds available for division and differentiate them from the separate property not available for division based on the values stated by the actuary. Again, this interpretation and negotiation can help you ensure you are able to keep all assets you contributed before the marriage and fairly divide assets that are marital property.
Avoid These Tactics
While protecting your 401(k) from unfair depletion is a key financial consideration during divorce, it is crucial to do so legally. These strategies to protect your funds may be tempting but can result in financial losses or legal penalties.
Selling Assets Can Pose a Risk for Loss
Some may think that liquidating retirement as a way of gaining some cash is better than having the retirement account split between the couple in the divorce settlement. However, penalties result for those who take out money from their account early. This can be a costly loss. Additionally, if you choose to sell assets when the market is in a downturn, you risk losing money during the sale.
It is important to remember that even if you decide to liquidate your assets before divorce, you are still legally obligated to divide them in divorce. Before liquidating assets, it is wise to speak with your attorney to determine your next steps.
Hiding 401(k) Accounts From the Court Is Perjury
Many people facing divorce are tempted to avoid disclosing valuable assets. This is often done in an attempt to protect from being divided between spouses during the property division process. However, you must disclose all assets, including 401(k) accounts.
It is unlawful to refuse to reveal all assets when going through the divorce process and negotiating a settlement. Failure to provide all requested information in a divorce case is considered perjury if done under oath in court. It can also be considered fraud. Deliberately hiding assets can lead to fines or jail time for contempt of court.
Can You Lose Your Retirement Savings in a Divorce?
Divorce settlements usually result in an equitable distribution of community property – the marital property earned or purchased by the spouses during the marriage. This means that while assets may not be divided precisely 50/50, the court aims to divide them roughly in half to ensure both spouses receive comparable settlements. This may mean allowing a spouse to keep the entirety of one asset while the other spouse keeps others instead of dividing both in half.
If both spouses have worked for years, there is often more than one 401(k) involved. One spouse usually has a larger 401(k) than the other in those instances. When this happens, the spouse with the smaller account may be entitled to assets from the spouse with the larger account. If both spouses have roughly equal 401(k) amounts, they may decide to keep their individual 401(k) savings in the divorce settlement without further distributing the other’s 401(k) account.
High net-worth divorces can present an additional challenge due to the couple potentially having multiple forms of retirement accounts. A high net worth divorce involves a couple seeking divorce while holding assets that are worth millions of dollars. These divorces also tend to include multiple different types of assets. Because of this, high-asset divorces typically take longer during asset division and can result in unique division strategies that consider numerous assets. It is unlikely that either spouse will lose the entirety of their 401(k).
Understanding that your retirement account is considered a marital asset will help as you begin to navigate the division process. The purpose of divorce settlements is to split marital assets as equitably as possible under state law, so it is unlikely that you will lose your retirement savings completely. However, unless you have a marital agreement in place, you will most likely need to divide your 401(k).
Understand the Regulations of Your Retirement Plan
Deciding on how to divide assets between two people in a divorce settlement is often one of the most contentious and difficult parts of the divorce process. Often, couples struggle to come to an agreement on their own without the help of attorney-led negotiation or mediation. Ultimately, the court must make a final decision.
As mentioned, retirement assets differ from other financial assets in the sense that they can not be simply split evenly between the couple due to tax laws and other regulations. Each retirement fund has its own rules that must be followed. Before negotiating the division of retirement assets, it is imperative that you fully understand the rules and regulations of your 401(k) and other retirement funds so that you know what is allowed and what isn’t.
This is especially true in regard to withdrawing money. Many retirement plans have explicit guidelines dictating when and how the assets may be distributed to a former spouse. For example, some ex-spouses may receive a payment before he or she reaches retirement, while others do not allow payment to the ex-spouse until after he or she has reached retirement age.
If you’d like a broad overview of how assets will be distributed once the divorce is finalized, a summary plan description can help to give you insight.
The Importance of Skilled Negotiation
Dividing retirement assets can prove to be costly to both you and your spouse. It can also draw out the divorce process. For couples of similar ages and similar retirement account values, it is typically wise to retain your individual accounts. However, negotiating may be necessary for couples with a wider age or valuation gap.
Your attorney can help you negotiate the allocation of other assets of similar value to compensate for the disparity in your retirement accounts. Doing so can save you from the financial implications of moving 401(k) assets. Negotiation can also help you keep your 401(k) intact for future contributions.
Family Law Attorney Skilled in the Distribution of Property and Division of Debt in a Divorce
Gillespie, Shields & Taylor is an Arizona family law firm with decades of experience with divorce and the division of assets. Our family law and QDRO attorneys have a deep understanding of the critical factors in divorce, including asset division, child custody, child support, prenuptial agreements, spousal maintenance, and more. We are passionate about family law and ensuring our clients are able to achieve an equitable settlement.
Contact Gillespie, Shields & Taylor today to request a consultation with our knowledgeable family attorneys.
*Editor’s Note: This article is a combination of articles originally published August 23, 2021 and August 6, 2021 and updated August 7, 2024.
