How Are 401(k)s Handled in a Divorce?Spouses who are divorcing need to address what property should be divided and how. Common assets that need to be considered are the marital home, bank accounts, cars, businesses, personal possessions, and any assets that can be sold today. Your retirement benefits, including your 401(k), may also be considered marital property, even though you can’t access them right away.

It’s critical that you work with skilled Franklin divorce lawyers who understand how to value retirement benefits, how to negotiate how much of the retirement benefit you can keep, and how to arrange for the transfer of benefits when the benefits vest. In many cases, if you have a 401(k), it’s possible to keep your entire 401(k) provided you offer your spouse assets of comparable value.

The division of a 401 (k)

In Tennessee, a 401(k) is considered marital property. This means your spouse has a claim to an equitable share of your 401(k) even if the account is titled in just your name. An equitable share is not the same as an equal share. An equitable share may be a 55/45 or 60/40 split of your assets, based on equitable factors such as the overall finances and health of each of the spouses and the ability of each spouse to earn a living.

There are a few additional considerations:

  • If you placed any funds into the 401(k) before you married, then the portion of the 401(k) that reflects those funds should be yours to keep.
  • The value of the 401(k) should be reduced by whatever taxes need to be paid when the distributions are made:
    • With a traditional 401(k), you defer paying taxes on any distributions until the distribution is made.
    • With a Roth 401(k), you don’t pay taxes on the distributions/withdrawals because you already paid the taxes on the money you invest in them. This is why a Roth 401(k) is sometimes considered more valuable than a traditional 401(k).

According to Motley Fool, a financial online resource, you’ll need to work with the companies that hold your benefits and your accountant or a financial professional to determine how much your benefit is worth in today’s dollars. Normally, the administrator of the 401(k) or other retirement benefits should be able to provide this information. Any plan to distribute the 401(k) now or are at a later date must be approved by the plan administrator.

Divisions of property considerations for your 401(k)

The easiest way to address your 401(k) after the value of the account has been determined is to simply not divide it. If your 401(k) has a current value of $50,000, and you and your spouse have equal equitable shares, then you and your spouse can agree that your spouse keeps $50,000 in other assets so you can keep your retirement account intact. These other assets can be his/her interest in a business, their interest in their own retirement plans, your share in some of your spouse’s assets, or other assets that can be traded. Cash works, too. You can agree to give over a larger share of the proceeds from the sale of your house (or other property) in exchange for keeping your 401(k) intact.

Distribution of a 401 (k) by a QDRO

If you and your spouse do agree that your spouse has an interest in your 401(k), then your lawyers will need to prepare a legal document called a Qualified Domestic Relations Order (QDRO). Normally, the QDRO divides the 401(k) into two accounts. Some exceptions may apply.

Once the QDRO is approved by you, your spouse, the entity that holds and manages the 401(k) (such as your employer) and the judge, then you can both continue to manage and invest your separate money as you see fit. If you retain control of the original account, you can contribute to it, but your spouse cannot.

Distribution of a 401(k) by an early withdrawal

An alternative to using a QDRO is to withdraw the funds from your 401(k) that are necessary to pay off your spouse. Your spouse might be willing to accept a lower amount to have the money now, instead of waiting for the time QDRO withdraws to take effect. Normally, your spouse can’t be paid her share of the 401(k) until you take your share.

If you withdraw funds now, you and your spouse will have to account for the taxes that are due depending on the type of IRA. Also, if you are younger than 59 and ½, there is a steep penalty imposed by the Internal Revenue Service (IRS). You and your spouse, through your lawyers, should reach an agreement as to who is responsible for the taxes and penalty. Normally, each spouse will be liable in the same share as their equitable distribution share.

Distribution of a 401(k) by a rollover

In some situations, you may be able to roll over your 401(k) funds into an IRA account if you no longer work for your employer, or the 401(k) permits the rollover. This way, you can create two IRA accounts – one for your funds in your name and one for your spouse’s in his/her name. There may be a rollover fee, but those fees aren’t usually too expensive. With an IRA, you generally don’t have to be concerned about paying taxes when you withdraw the funds when you retire.

A skilled Franklin divorce lawyer should understand these various options and your divorce rights. Our attorneys can explain them to you in full, review your finances and discuss your options, and then negotiate a settlement with your spouse.

At the Law Offices of Adrian H. Altshuler & Associates, we first work to identity all the marital property that you and your spouse own. We then work, often with accountants or appraisers, to place a proper value on the assets. Once we know all the assets and their value, we help you prioritize the property you want to keep and negotiate just property division settlements. Our family lawyer is ready to present your case before a judge if necessary. To discuss the division of your assets and all other divorce-related issues, please call our office at 615-977-9370 or fill out our contact form to make an appointment. We fight for families in and around Franklin, Columbia, and Brentwood, Tennessee.