During divorce, you’ll want to make informed choices to safeguard your retirement security. Here’s what you need to know.
401(k) Valuation and Assessment
Money in a 401(k) is typically invested in assets such as equities or bonds. The value of a 401(k) can fluctuate over time based on the performance of your investments. As a result, it’s crucial to ensure a 401(k) is properly valued so you can understand what it’s worth when marital assets are being divided.
It’s also important to note that only funds acquired during the marriage are marital property. If you had assets in the 401(k) before marriage, that money is typically considered separate property and should not be a part of the marital estate when assets are divided between spouses.
Negotiating Equitable 401(k) Distribution
Once you understand the value of a 401(k), decisions must be made about what should happen to this account and other assets during the divorce process.
If you have a valid prenuptial agreement, this should control the division of property. Likewise, if you created a postnuptial agreement that’s legally valid, this contract can control what happens.
If you do not have a contract in place made before divorce, you and your spouse can negotiate on property division during the process of dissolving your marriage and create your own divorce settlement agreement. If you cannot agree, the court will divide assets for you using equitable distribution or community property rules, depending on where you live.
Equitable distribution involves dividing up all marital property, including a 401(k), in a fair and appropriate way, given factors such as the length of the marriage and the contributions each spouse made to it.
Community property rules, which apply in some states, divide all martial property 50/50.
Utilizing a Qualified Domestic Relations Order (QDRO)
When a 401(k) account must be divided as part of a marriage dissolution, you need a QDRO.
This legal order requires a 401(k) administrator to distribute part of a 401(k) or other plan covered by the Employee Retirement Income Security Act (ERISA) to a former spouse as part of divorce proceedings.
A QDRO must include detailed information about the retirement plan and a clear and complete explanation of how retirement benefits must be split. The plan administrator will confirm that the QDRO fully complies with plan requirements.
QDROs are often separate from a broader divorce settlement agreement, specifically providing instructions for dividing retirement assets. They must arrange the distribution to the ex-spouse and avoid early withdrawal penalties when funds are taken from qualified retirement plans early.
Exploring Alternative Asset Allocations
Couples must divide property equitably or equally, depending on which rules apply. However, this does not necessarily mean that each spouse must get half of each individual asset. In other words, you don’t necessarily have to split each bank account, retirement account and savings account exactly in half. The goal is for the entire marital estate to be divided appropriately.
This means you may want to explore alternative methods of dividing assets that don’t require part of a 401(k) to be distributed. For example, you could propose that your spouse keep a shared family home and you keep your own retirement plan.
By exploring alternatives to dividing up a 401(k), you may be able to simplify the marriage dissolution process and better protect your retirement security.