What Happens To Your 401(k) In A Divorce?
During a the division of assets phase of a divorce, many people are surprised to learn that the money they put into their 401(k) plan qualifies as marital property. California’s community property laws mean that a spouse could lose a significant portion of their retirement account, especially if they’ve been married for a long time and contributing throughout the marriage.
However, unlike checking and savings accounts, dividing a 401(k) account is a much more complicated process that has additional considerations that a judge will take into account.
Process For Dividing A 401(k)
Splitting up a 401(k) account during a divorce is actually a three step process:
1) Divorce Decree: The official divorce decree must specify that the account is to be divided. If the decree does not specifically identify this, then the account cannot be touched by anyone other than the original account owner.
2) Qualified Domestic Relations Orders: Assuming the divorce decree calls for the account to be split, an attorney must then create a legal document called a Qualified Domestic Relations Order, commonly referred to as a QDRO.
The order must spell out exactly how much (the dollar amount or percentage) the receiving spouse is getting.
3) Court Approval: Finally, a judge must approve and sign the QDRO. Once signed, it goes back to the plan administrator, who must also approve the order. Once approved, the QDRO establishes the recipient as an “alternate payee”, which just means someone other than the original account holder who can receive payment from the account.
Protecting Your Account
For those who have a substantial amount of money in their 401(k) accounts and are worried about protecting it during a divorce, there are a few possible alternatives.
The most common alternative to splitting a 401(k) is for the spouse who owns the account to give up other marital assets of equal value. Depending on the amount currently in the account, and the length of time before they plan on retiring, this could mean the difference between giving up a car or the family home.
For example, if a 401(k) is worth $100,000 at the time of the divorce, and the account holder has a fairly long time horizon before retirement (during which time the account will earn compound, tax-deferred interest), that account may be worth much more than $100,000 at the time of retirement. In a case like this, finding an comparable amount of assets to give up can be difficult.
Working With A Lawyer
If you are concerned about losing a portion of your retirement account during your divorce, strongly consider contacting an experienced divorce and family law attorney. There are a number of additional factors during the division of assets phase of your divorce that can impact what you may or may not have to give up.
Having a competent attorney acting on your behalf can also remove the added stress and anxiety that often comes from having to deal with the financial aspects of divorce. Contact our offices today for a free consultation.
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