How to Split 401(K) in Divorce?

Summary 

What happens to my 401(k) in a divorce? 

For many Americans, the 401(k) plan they contribute to at work is one of their most important assets.  

However, with almost 50% of American marriages ending in divorce, if you split up, your respective 401(k)s will feature in your financial agreement whether you work out the agreement yourselves or the court determines it for you.  

This is not surprising, as a retirement savings plan known as a 401(k) has tax advantages for the saver and provides them with a stable income later in life.  

One of the most important things to remember about your work-sponsored retirement plan is that you own your 401(k) individually. Your spouse does not share joint ownership of it with you, even if they are named as a beneficiary. The same applies to your spouse’s 401(k) – they own their plan individually. 

If you get divorced, the financial settlement may include the dividing of your assets, including your 401(k)s, along with individual holdings and jointly held assets. 401(k) in divorce is divided through a qualified domestic relations order (QDRO).  

How this happens is influenced by the state you live in, especially if you leave the division of your assets to a judge. If you live in a community property state – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – the court will divide your marital assets 50/50. If you’ve contributed to your 401(k) since before marriage, the money contributed during that time will not be considered a marital asset.  

If you live in an equitable distribution state – all remaining states - the court will divide your assets in what it determines is an equitable manner. This may or may not be a 50/50 split. Learn more about how to split 401(k) in divorce with us. 

How long does it take to get 401(K) after divorce? 

For some spouses, one of the big questions around work-sponsored retirement plans when splitting is how long it takes to get 401(k) after divorce. The answer depends on which of the three basic options the spouse on the receiving end of a 401(k) distribution chooses or is awarded by the court.  

One option is to defer the distribution until the account owner retires. If you choose this option, you can either opt for a lump sum or regular payments. However, if you leave the money in the retirement account, you will need to start taking required minimum distributions (RMDs) from age 70 ½ to avoid penalties. 

Another option is to roll the assets over into your own qualified retirement savings plan. This happens via a direct transfer, and there’s no need for you to pay a penalty.  

A third option when dividing a 401(k) in divorce is to cash out your portion of the balance. While this offers easy access to money, it can come at a price. If you’re younger than 59 ½ at the time of your payout, you might need to pay a 10% early withdrawal penalty as well as income taxes. 

Speaking to a regulated financial advisor can help you make the best decision for getting 401(k) after divorce. We can connect you with a financial advisor you can trust. 

What is a qualified domestic relations order (QDRO)? 

If you get divorced, your assets will be divided with your spouse according to a qualified domestic relations order (QDRO).  

Let’s take a closer look at what a qualified domestic relations order is. 

The Internal Revenue Service (IRS) defines this as a decree, judgment, or order for a retirement plan to pay alimony, child support, or marital property rights to a spouse, former spouse, or dependent of the participant, such as a child. 

The spouse who is entitled to receive a portion of the other spouse’s 401(k) in divorce is known as an alternate payee. If you are an alternate payee, you might have several options when it comes to how you receive your money from your spouse’s work-sponsored retirement plan. 

If you choose the shared payments option, each benefit payment that the plan participant receives will be split proportionately between you and your ex-spouse. If you choose the separate interest option, the 401(k) account will be divided into two proportionate parts. The plan administrator might put the alternate payee’s share into a separate QDRO account, giving the alternate payee greater choice when it comes to receiving benefits according to their own timetable.  

Another possibility is that the alternate payee can take their share as a lump sum, adding it to their own 401(k) or their IRA. 

In a divorce, are 401(K) contributions tax deductible? 

Another important question is whether 401(k) contributions are tax-deductible. While you cannot deduct 401(k) contributions on your income tax return, you can potentially pay less tax as the money you save in your 401(k) is deducted from your gross income. 

However, there is a tax advantage to your former spouse taking a distribution directly from the 401(k) plan instead of rolling their share over into an IRA. QDROs are not subject to the 10% early distribution penalty tax that normally applies to distributions to 401(k) plan participants younger than 59 ½. This tax exemption applies to early distribution from the 401(k) plan only, although these funds will still be subject to federal and possibly state income tax. 

The 10% penalty will apply if the funds are rolled into an IRA before distribution. The QDRO 10% penalty tax exemption does not apply to IRA distributions. 

How to protect your 401k in a divorce? 

If you’re splitting up, you’ll want to know how to protect your 401(k) in divorce. There are several ways to do this. 

You can gather evidence that helps you to keep more of the money in your work-sponsored retirement plan, and you can make a few lifestyle changes to cut back on spending so you can contribute more money to your 401(k). You can also think about how close you are to Social Security (age 62), and you can consider selling your home. 

If you have something other than the money in your 401(k) to offer to your spouse when negotiating a divorce settlement, there’s a good chance you can keep more of the money in that plan. You might not be able to prevent your ex-spouse from getting some of your 401(k) money, but with the right guidance and choices, you can put money back into your retirement plan after you get divorced. 

The bottom line 

Considering the significance of a work-sponsored retirement plan as an asset, it’s important to understand how it could be shared with your former spouse.  

It’s also crucial that you know the various options and potential tax implications of 401(k) and divorce. While you can’t necessarily withhold all your 401(k) money from your ex-spouse, you can protect it. 

Working with an SEC-regulated financial advisor can help you navigate through a divorce 401(k) split. In addition to offering helpful advice, an advisor can help you create a bespoke plan for financial recovery after your divorce is finalized. Unbiased can help you find the best financial advisor for your needs. Get matched with an advisor here.