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How To Divide 401k In Divorce

Tricky Divorce Issue: How To Divide 401s Iras And Annuities

How Do You Divide 401(k) and IRA Accounts in Divorce? | Texas Attorney

The tax implications can make these assets more complicated to split in a divorce settlement.

Many things occupy your mind during a divorce. Understandably, taxes can likely fall to the bottom of the list. But there are critical tax considerations that should be evaluated, particularly when it comes to dividing qualified assets, such as 401s, IRAs and annuities.

How Do You Split Retirement Assets Like A 401

Like most other assets, retirement accounts like a 401 or IRA can enter into the equation of equitable distribution. The role they play, however, depends on when they were established and how they behaved over time:

  • Before: A 401 established before marriage could be a separate asset if neither spouse benefited from it during the marriage. If the asset was rolled over to a current employer without any contributions, matches, or deferred compensation during the marriage, then it could be separate.
  • During: Funds added to the retirement account during the marriage are likely marital assets, though the line can depend on the payments. The needle can shift if the 401 started before the marriage but the account matured, or money was paid in or out before the separation.
  • After: A 401 that continues to grow during your separation can still count toward a divisible asset. The change in value up to the time of your divorce could add to the value of your property.

Its possible that a single account falls across the before, during, and after periods, making 401 division a complicated process that depends heavily on values across the timeline.

How Is A 401k Divided In Divorce

Dividing a 401k in divorce can get complicated quickly. Because Texas is a community property state, all marital assets are to be divided 50/50. However, money invested in a 401K prior to marriage does not fall into the marital asset category. In other words, money invested in a 401K plan before the marriage is not considered community property, and therefore, not divided. A court must determine how much of the 401K was earned during the marriage and how much was earned separately. This is often a complicated undertaking, especially since interest accumulated by the plan is likely to be considered community property. Its important to work with a skilled attorney during this process to make sure your rights are protected.

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Dont Attempt A Division Of Retirement Assets Without The Help Of An Experienced Kansas Lawyer

While many people choose to handle their own divorce and represent themselves in court, dividing retirement accounts is one task that especially should not be undertaken without legal help. At The Henry Firm, P.A., with offices in Overland Park, Kansas, we can assess your situation quickly and reliably, and draft retirement division orders with care. To schedule a consultation, call or contact us online.

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When Your Relationship Fades Don’t Let Your Savings Go With It

401k &  Divorce  Freed Marcroft LLC

Divorce takes an emotional and financial toll. You and your soon-to-be ex-spouse have to decide how to divide all your assets, including retirement accounts like your 401s. Finding a solution that both parties can agree on is part of the challenge, but you also have to figure out how to minimize taxes or you’ll lose even more of your savings to the government.

Below, we’ll take a look at what typically happens to 401 assets during a divorce and what steps you can take to hold onto as much of your savings as possible.

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What Happens To The Order And Final Judgment

You must enter the final judgment and the order when filing divorce documents. The judgment will give the plan description for the division of the 401K between the parties involved. Next, drafting and filing of a Qualified Domestic Relations Order take place. The QDRO serves as a formal court document that instructs the administrator of the 401k plan on how to divide the 401k plan between the parties.

The order will identify the number of retirement funds and life insurance policies in the account going to the other spouse. The division of the 401k must comply with the Employee Retirement Income Security Act. The judge will review the QDRO and, if everything is correct , theyll enter the order.

The filed QDRO is then sent to the plan administrator to divide the retirement savings into two parts: the plan participant portion and the portion awarded to the alternate payee spouse in a separate process. You should know that the divorce decree alone doesnt qualify one to divide the 401k. A lot has to be looked into within the savings accounts and future benefits.

Dividing 401s And Pensions

Dividing 401s and pensions can seem quite complex because you need to obtain a Qualified Domestic Relations Order , which is a court order separate from a divorce decree. A spouse has legal grounds to all or part of a 401, and each plan has specific benefit provisions and administrative rules. For example, some plan administrators require you to wait until retirement to officially divide the assets.

Most divorce attorneys would promote reaching an amicable agreement with your spouse. Here are four options to consider:

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Dividing Retirement Funds Can Require Extra Considerations

Depending on how a spouse accesses their share of the funds through the QDRO, there can be significant consequences to consider. A lump sum will likely mean the receiving spouse will owe income tax, while keeping the money in a plan could allow tax deferment until payouts begin.

While these actions usually behave like normal with tax implications, the money that comes from a QDRO does have an important distinction. There wont likely be an early withdrawal penalty, no matter the spouses age, which breaks from the standard practice for pulling assets from a retirement account.

Drafting A Qdro During Divorce

How Is A 401k Account Divided In Divorce? Laurie Itkin & Scott Levin Explain

A DRO is not considered “qualified” unless it’s been approved by the retirement plan’s administrator and the court. Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are good enough, but if your share of your spouse’s retirement account is large, you may want to work with a lawyer.

A lawyer who specializes in QDROs can ensure that each aspect of your marital settlement agreement is part of the QDRO. They can also help ensure that your rights are fully covered in a way that a basic QDRO form may not be able to provide.

If your lawyer is not experienced in QDROs, it might take them longer to do the research and fill out any forms, which could end up costing you more in legal fees. There’s also the chance that they could miss something important that could cost you money.

Another factor in the writing of a QDRO is the type of retirement plan in question. Defined contribution plan assets plans) are easier to calculate than defined benefit plan assets . That’s because defined benefit plan payments are based on complex calculations as well as other factors, like years of employment. If your spouse has this type of plan, your lawyer may have to hire an actuary to figure out your share of the plan assets.

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What Do You Need To Divide A 401 In A Divorce

As soon as a court finalizes your divorce, the judge must sign and submit a carefully drawn QDRO to your plan administrator. Once your plan administrator approves the QDRO, you can safely move your exs share without facing an early withdrawal penalty if youre younger than age 59.5.

When assets are getting divided up, the IRS doesnt see the transaction as a withdrawal as long as its done under the direction of a QDRO approved by a plan administrator. QDROs can be complex, so make sure you hire an attorney who specializes in this field. A qualified financial advisor can also serve as a valuable resource if youre negotiating with a spouse on how to split assets without the overarching guidance of the court.

Once an approved QDRO lays out how to divide 401 assets, your ex spouse will have a few options as to how he or she gets her share.

Let The Plan Know How To Handle The Distribution

Different plans have different distribution options available. They will typically send you a form asking how you would like the funds distributed. For example, you might be able to maintain a 401K account at the same plan, or you might be able to roll the funds into an IRA at the same financial institution.

You could also choose to roll the funds over into your own IRA. You may also want to take a distribution from the account if you need some cash or you want to pay down some marital debt. Remember that distributions received directly from a 401K as assigned by a QDRO avoid the 10% tax penalty for early withdrawal .

If you are taking a portion as a cash withdrawal, I cannot recommend enough that you have a professional assist you with this. There is a right way and a wrong way to handle it, and the wrong way can be very costly. It is well worth it to make sure you handle this correctly.

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Dividing The Pensions Shares At The Time Of Retirement

Divorcing parties have the option to divide the pensions shares on their own but defer payment at the time when the spouse with the pension retires. Upon agreement, both spouses may submit a Qualified Domestic Relations Order to the court describing the way in which the pensions shares will be divided at retirement.

Is It Legal To Cash Out Your 401 Before A Divorce

5+ Glorious Stop Contributing To 401k Divorce Ideas

After a divorce starts, it is generally not permitted to dispose of martial assets such as retirement accounts. Additionally, just because you empty the account doesn’t mean that your spouse won’t just ask for their martial share, so you could still end up having to pay. Finally, while you can choose to cash out your 401 whenever you want, there is a penalty fee of 10% if you are under age 59 ý, and you will owe income tax.

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Learn About The Rules For Dividing Iras 401s And Other Retirement Plans In Divorce How To Collect Your Share Of These Accountswithout Running Afoul Of The Irsand How To Get Help

Besides a home, retirement accounts are often a couple’s most valuable assetsparticularly for those who’ve been married a long time. When a marriage ends, those accounts will probably be split between the spouses. There are different ways to get that done, but laws and government regulations control the options. If you don’t follow these rules carefully, you could face a financial nightmareespecially if you are divorcing late in life. Here’s an overview of what’s involved in dividing retirement accounts in a divorce.

How To Protect Your 401k In A Divorce

By FindLaw Staff | Reviewed by Kellie Pantekoek, Esq. | Last updated July 10, 2020

This article will help answer frequently asked questions about what happens to a 401k, or other similar retirement accounts, in the event of a divorce.

Your ex-spouse will generally have access to a marital share of your retirement accounts after a divorce, but there are ways to protect your retirement plan and financial assets.

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Defer Payments Until Account Owner Retires


If your plan administrator allows it, your ex can leave his or her share invested in the plan and wait until you retire to begin taking distributions. This might make sense if your ex is younger than 59.5 and doesnt immediately need the funds. However, he or she would need to start taking required minimum distributions upon reaching age 70.5.

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How Are 401ks Split In A Divorce

A 401K is one of the most common types of retirement savings accounts. Most married couples in California have 401Ks that either one or both spouses have been contributing to throughout the marriage. Unfortunately, if you are one of these couples, you are looking at a complicated legal matter when it comes to getting a divorce. Depending on facts such as when you opened your savings account, your spouse may be legally entitled to at least part of the value of your 401K.

For the most part, 401Ks in California are split down the middle in a divorce case. This means your spouse may be entitled to 50 percent of the value of your 401K, even if you were the sole contributor. This will only be the case if you opened the retirement account after your marriage or if you commingled your 401K with your spouses retirement savings. In these scenarios, your 401K is classified as community property, making it eligible for division in a divorce case. This rule will only apply to the amount you contributed to your 401K during your marriage, however. This is a complicated area of law that can change on a case-by-case basis.

Dividing An Ira: Transfer Incident

If you specified that your IRA division is to be treated as a transfer incident to divorce in your agreement, no tax will be assessed on the separation transaction. The movement of funds may be classified as either a transfer or a rollover by the IRA custodian, depending on the circumstances of the division and how the decree is worded.

The recipient will take legal ownership of the assets when the transfer is complete and then assume sole total responsibility for the tax consequences of any future transactions or distributions. This means that if you are going to give half of your IRA to your soon-to-be ex-spouse in the form of a properly labeled transfer incident, they will have to pay the tax on any distributions they take out of the account after they receive the funds. You will not owe tax on the assets that were sent to them because you followed the IRS rules for transfer incidents.

If, however, you failed to adequately label your division as such, you will owe both tax and an early withdrawal penalty on the entire amount that your ex-spouse received. In order to avoid this, be sure to clearly list both the division percentage breakdown and the dollar amount of IRA assets transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.

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What Are The Different Types Of Retirement Accounts

There are several varieties of retirement accounts, ranging from savings that your company matches throughout the course of your employment, pension plans that are dependent upon working for a company for a specific period of time, and stock options. The common types of retirement plans can be split up into three categories and are as follows.

Rules For Dividing 401 Plans

Find Out What Happens To a 401k in a Divorce

401s and pensions are considered qualified plans for tax purposes, and they are subject to Section 401 of the US Tax Code. These funds can only be split through a Qualified Domestic Relations Order , which allows parties to distribute funds in their qualified retirement plan to their spouse. In the absence of a QDRO, the plan administrator will not disburse the funds to the other spouse.

If you and your spouse agree to get a divorce, you need to consult your divorce attorney on the terms of a QDRO. The QDRO is drawn by a judge, and it demands that a portion of the 401 be disbursed over to an alternate payee. Once it is signed, the attorney sends it to the 401 plan administrator, who must approve the order and initiate the distribution. If the plan administrator rejects the plan, it must provide reasons for the rejection, and the parties should amend the order and resubmit it for approval.

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State Law Dictates Division Rules

States have different laws regarding the treatment of property acquired prior to and during a marriage. Things are different in California than in Texas or North Carolina, so knowing relevant state law is key. In equitable distribution states, the court looks at factors like each spouses financial situation, ability to earn income and the length of the marriage in order to divide a couples assets in a manner thats fair to both parties. That doesnt mean, however, that its an automatic 50-50 split.

In a community property state, on the other hand, any assets gained during the marriage are considered to be owned jointly by both spouses, regardless of who was actually responsible for securing them. In that case, each of you would usually be entitled to half of the money held in a 401. There are some exceptions, including sometimes when a prenuptial agreement is in place.

How Is A 401k Divided During A Divorce

Although a divorce decree can stipulate that retirement funds must be divided, when a 401 is involved, the only official way to separate the funds is by executing a Qualified Domestic Relations Order .

As you are going through the divorce process, it is essential that you identify retirement assets so that they can be properly addressed in the divorce decree.

The divorce decree must order the division of all affected retirement accounts and detail which spouse receives what as part of the court order.

To execute the separation of the 401 plan, a QDRO must be drafted that will tell the 401 plan administrator how to divide the retirement asset.

Its strongly recommended to submit the draft QDRO to the 401 plan administer for their review and approval.

Once you have ensured that the QDRO meets the requirements of the 401 plan administrator, you must then submit the QDRO to the court for their approval.

The endorsed-filed copy of the QDRO can then be resubmitted to the plan administrator to effectuate the transfer.

The QDRO establishes an alternate payee who will now also be able to receive payments from a 401.

Each retirement account will require a separate QDRO , so if you have multiple retirement accounts, be prepared for this eventuality.

If a spouse takes a lump sum payment, the IRS will treat that as ordinary income and there will be a tax liability on the amount ).

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