While there are many notable concerns for spouses approaching divorce, retirement accounts can be especially problematic and complex. With the rate of so-called “grey divorce” climbing rapidly, this is an issue that divorce attorneys across the nation can expect to see more of in the coming years. In addition, surveys have shown that up to 70% of Americans doubt they will receive their full benefits. With so much concern about retirement, spouses are more likely than ever before to fight over things like 401(k)s and other retirement benefits.
The Basics of 401(k)s and Divorce
As many divorce attorneys are no doubt aware, dividing a 401(k) can be complex. In both community property and equitable distribution states, it is necessary to assess whether or not the funds in 401(k)s are marital or separate assets. To make matters even more complicated, 401(k)s often contain a mixture of both marital and separate assets. In other words, money put into a 401(k) before the marriage (or after the separation) is considered separate, while money put into the 401(k) during the marriage is considered marital property.
With these concerns in mind, one of the most important steps is to assess exactly how much money belongs to each spouse and how much the 401(k) is worth as a whole. Note that it is not necessarily required to liquidate the 401(k) in order to divide it. In an ideal world, both spouses would have approximately the same amount of money in their 401(k)s, they can simply keep their own savings and avoid any complex division.
When Things Become Complex
Things immediately become complex when one spouse has more savings than the other in their 401(k). The problems mostly stem from the “rules” of 401(k)s. You cannot simply take out sums of money on a whim. Doing so may trigger taxable transactions, and both spouses could lose significant amounts of money if they approach this situation in the wrong way. Because of this, a much more viable solution is to trade assets instead of dividing up the 401(k). For example, one spouse might keep the marital home while the other keeps complete control of the 401(k).
Qualified Domestic Relations Orders
If spouses do decide that dividing the 401(k) is the best option, they will need to obtain a qualified domestic relations order, otherwise known as a QDRO. This is a court order that allows a spouse to access a portion of the 401(k). The 401(k) is generally split into two new accounts. Of course, spouses can also choose to simply withdraw funds from the 401(k) directly and simply pay their former partner. However, taxes can be significant in this scenario, especially if spouses are younger than 60.
Knowing the Details of the Plan
There are many different types of 401(k)s, and it is important for spouses to become familiar with the unique aspects of their own specific 401(k) before moving forward. Once they gain a complete understanding of how their 401(k) works, it becomes easier to divide it in an efficient manner.