How to Split the 401k in a Divorce

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When a couple makes the decision to go through with a divorce, both will face a plethora of decisions regarding how to split their lives apart in a way that is efficient and fair.  After sharing finances, debts, and savings accounts for years, splitting assets up can be confusing and frustrating for both parties.

Some spouses have obtained a substantial amount of 401k funds over their time together, and one problem that often arises in a divorce is how these funds will be split or shared after the couple separates.  The matter of 401k funds can be touchy because protecting funds that give a person the ability to retire hits close to home.

If you’re considering a divorce, and share a 401k fund with your spouse, there are some options to be aware of that may help you organize your thoughts around how to split that 401k equitably. An article from the 401k help center offers some helpful advice.

First, take time to become educated on your 401k-plan administrator’s rules and restrictions in regards to splitting the funds. Also, discuss your thoughts and concerns with an experienced divorce lawyer who will help advise you on decisions throughout the divorce process.

Next, you’ll need to review all your options to determine which is best for your unique situation. Below are two of the most common options for splitting a 401k.

Option 1: You’ll keep the 401k and your spouse takes other marital assets of proportional value.  This might seem the least complicated, but it does require attentive research and financial calculations.  If this option seems favorable to you, you’ll need to examine two economic factors to guarantee that you and your spouse stay in impartial financial status.

  1. The long-term tax consequences
  2. The current and long-term value of the assets being split

For the bearer of the 401k plan: you’ll need to subtract the imputed tax from the value of the funds at the time of retirement, meaning the tax that you’ll have to pay on the amount of money in the account.  Conversely, the person receiving other assets will want to compare their value with the value of the 401k, to make sure the assets are equally as valuable in the long run.

Option 2: You and your ex-spouse split the 401k assets, fifty-fifty. In order to do this, you and your partner will need a Qualified Domestic Relations Order.  A QDRO is a court order that gives the right for an alternate person to receive part of the 401k-plan account.  This order is often connected to the terms of child support, alimony payments, or marital property rights.

The simplest way to go about this option is receiving a QDRO that specifies that the 401k plan will be split into two separate accounts.  This enables the original owner of the accounts to manage and contribute to the account as before, while the other person will be able to make investment choices for his or her portion of the account. When the time comes for retirement, both will be eligible for monetary distributions.

Whether you decide to divide assets or draft a QDRO with your spouse to split the 401k, the process can get complicated.  Making a decision and drafting documents with the consultation of a divorce attorney will make the undertaking less overwhelming.

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About Julie Clark

Julie M. Clark graduated from the University of the Pacific’s McGeorge School of Law. She has been practicing law in Riverside County since February of 1992. Julie Clark's Google+ Profile

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