Divorce and your 401k
Is my spouse entitled to my retirement account if we divorce?
Divorce is difficult for everyone involved. If the emotional turmoil is not enough, there are financial implications, too. If you have been saving for retirement, you are probably wondering what happens to that savings during a divorce. No situation is the same, but here are some basic things to expect.
It starts at the beginning
The first thing to consider is the steps you took prior to marriage. Was there a prenuptial agreement? If so, what happens now goes by what is in the agreement. Without a prenuptial agreement, your spouse is entitled to at least a portion of your 401k.
What’s mine is yours
Any income added to your retirement account, or to your spouse’s retirement account, during your marriage is generally considered marital property. This usually includes any money that either the individual or their employer adds to the account. In basic terms, this simply means that all of those contributions are fair game in the divorce. Any retirement accounts that are considered marital property should be divided in a divorce.
The exacts of that division will be decided by the courts, and may revolve around how much you contributed financially throughout the marriage. In other words, splitting a 401k in divorce may not be a 50/50 split, especially if one spouse made more income than the other.
Get financial and legal advice about all the implications of your divorce. Be truthful about the assets you own. The more informed your advisors are, the better they can help you navigate through the divorce process.
Additionally, if you contributed personally to your spouse’s IRA, you can deduct that amount. Take a look at spousal IRA contribution limits for more information on this.
What is a QDRO?
You might have heard of a QDRO if you are in the midst of a divorce, but it is not exactly a term everyone is familiar with. It stands for a “Qualified Domestic Relations Order”. Basically, it is a court-issued document that one party can take to their spouse’s employer to ensure they get part of the retirement account. In short, it allows the retirement administrator to move funds to the other spouse’s retirement account without penalties for either party.
If your spouse has a retirement account, it is very important that you obtain a QDRO from the court system. Otherwise, he or she may cash out that money before the proceedings, leaving you with nothing.
What about a lump sum?
Either spouse can negotiate a lump sum from their spouse’s retirement account, but this comes with its own trouble– in the form of penalties. If you do not need the cash, leave it be.
Get the help you need
The internet can be full of great information, but nothing can beat having a professional beside you during your tough times. Get financial and legal advice about all the implications of your divorce. Be truthful about the assets you own. The more informed your advisors are, the better they can help you navigate through the divorce process.
A better way
If you can manage to sit down with your soon-to-be ex and come to a mutually satisfactory agreement, you will be doing both of you a favor. Taking your divorce to court can bring about some surprising results — usually not good ones.
It is better if you can come to an agreement together than to leave it to chance in the courtroom. With your attorneys present, you can hammer out all of the details of the divorce and save yourself a ton of court costs in the process.
A deeper dive- Related reading from the 101:
Finances can wreck a marriage. Do not let them make your divorce even worse.
Divorce can destroy your credit- don’t let that happen to you.