What Does Divorce Mean for my 401(k)?
Updated: Jul 1, 2020
You have worked hard to build up your 401(k), you savvy financial lady, so that you are on the right path for a most excellent retirement. Now, divorce has reared its ugly head. What does this mean for your precious 401(k) account? Can your soon-to-be ex-husband take a chunk out of your 401(k) and your retirement dreams in the process? Or, perhaps you’ve stayed home to raise the children for the last ten years, relying on your husband’s 401(k) to bring about your future retirement bliss. What now? Does he get to keep all that money, leaving you to start at ground zero?
The truth is that there really is not a standard precedent throughout the country when it comes to handling a 401(k) during a divorce proceeding. What happens to your (or your ex-husband’s) 401(k) will depend on the laws governing your state, your financial situation, the history of your marriage, and your financial needs. Let’s break this down a bit.
Community Property States
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, then you live in a community property state. (Alaska, always the rebel, is an opt-in community property state so community property rules may apply.) This means that your entire marriage estate – all the property you accrued while married – belongs to both of you and will be jointly divided when you get divorced. (Do you Know Where to Search for Hidden Assets During Divorce?)
This is good news for wives who earned less than their husbands or did not work outside the home, especially if they were married for many years. It means they are entitled to half of whatever their husbands socked away in their 401(k) accounts while they were married.
This is not such good news for wives who earned more than their husbands or supported stay-at-home dads. It means you will need to hand over half of what you put away during the years you were married. Yikes!
Equitable Distribution States
If you don’t live in one of the states listed above, then you live in an equitable distribution state. This means that a judge has the power to decide how to split the marriage estate in a way he/she feels is equitable based on your individual circumstances. This is where your individual financial situation and history, as well as the judge’s own perspective, all come into play. If the judge feels that you do not need money from your ex-husband’s 401(k) to cover your expenses, you may not get anything. On the other hand, if you can make a convincing case, you may be granted a portion. The same potential applies if you are the one with more assets than your ex-spouse.
You Can Decide How to Split Your 401(k)
You do not have to rely on the courts in your state to divide your marriage estate for you. You and your spouse can negotiate with one another and decide how to divvy up your assets. As long as you both agree to the settlement, the courts never need to get involved. This is where it is in your best interest to play nice with your spouse, even if bad feelings linger. If you want to keep your 401(k) safe and secure, or if you feel you deserve a portion of your spouse’s 401(k), then consider mediation or seek out a divorce attorney who can assist you with the negotiating process. (Learn more about Mediation: An Alternative to High-Cost Litigation.)
Splitting Your 401(k)
The actual act of splitting your 401(k) will have tax implications for you, and also may require a Qualified Domestic Relations Order, so it is in your best interest to work with a qualified professional to manage this process to your best benefit! (Learn more about Getting Income from Retirement Plans After Divorce.)
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