People preparing for divorce have unique goals for the future. Some people want to protect a professional practice that they’ve built up during the marriage. Goals related to specific marital assets are relatively common.
Those who have established retirement savings often worry about protecting their accounts. A 401(k) is a tax-deferred retirement account that workers contribute to throughout their careers. Sometimes, their employers also make contributions to the account. They can then use the funds in the account to cover living expenses when they are ready to retire.
Typically, everything people earn or accumulate during marriage is subject to division when they divorce. Does someone who established a well-funded 401(k) have to worry about dividing the account as part of a divorce?
The account likely requires disclosure
Any financial resources established with marital income are potentially marital property. Even when one spouse is the sole owner of the account, the use of marital income to fund the account makes it at least partially marital property.
The account holder must disclose the account to the other spouse and the courts as part of the financial discovery process. In some cases, part of the balance may be marital and part may be separate property because the spouse started the account before getting married or continued funding it after separating from their spouse.
The value of the 401(k) is likely to play a role in property division proceedings. However, people do not automatically have to divide the account. They can use its value when making decisions about other marital property and even marital debts.
If people do divide the account, they must proceed carefully. Withdrawals made before someone reaches retirement age can lead to tax consequences and also financial penalties. The penalty can be 10% of the amount withdrawn prematurely.
The amount pulled from the account contributes to the annual income of the account holder and may drastically increase their income tax obligations for the year. People can potentially avoid those consequences even if they have to divide the account, provided that they use a qualified domestic relations order (QDRO).
Understanding what property is subject to division and the right process for splitting certain assets can make a major difference for those preparing for divorce. 401(k)s and other financial accounts are vulnerable to division, but people can minimize the economic consequences of splitting their property with the right plan and paperwork.
