How to protect your 401K in a divorce

Divorce proceedings are as much a financial upheaval as an emotional one, and money may be at the forefront of your mind during this time. Even if it isn’t a concern, it is wise to protect your assets as much as possible in a divorce to ensure a healthy future for yourself and your family.

How do I protect my 401K?

It is a common concern among those undergoing divorce proceedings. A prenuptial agreement in place before tying-the-knot is the ideal situation. Unfortunately, it is not the case for many people.

A prenuptial agreement is a legally binding agreement that is set in place prior to getting married. It is a practical solution to deciding what assets are to be considered “separate property” in the event of a separation, and which are “marital property” to be divided up during the divorce proceedings. You can cite your 401K in this agreement as “separate property.”

If you don’t have a prenuptial agreement, though, your 401K will be considered part of the marital assets and divided accordingly. The best way to protect it following the initiation of divorce proceedings is to stop making voluntary contributions to it as soon as possible.

TIP: The law varies among states as to when you are legally allowed to stop making contributions, so you will need to check with a local divorce attorney before taking action.

Another possibility is to investigate whether state law allows you to exclude any contributions you made to your 401K before you married from the divorce settlement. The laws vary on this between jurisdictions, and you will need to consult a local divorce attorney for a clearer picture.

Outside of these possibilities, it is likely that your attorney will draft a QDRO (Qualified Domestic Relations Order) and send it to the divorce court. Once signed by a judge and accepted by the plan administrator, the division of assets will become official and can be enforced.

Typically, the judge will deem any post-marital contributions and subsequent earnings as a result of these contributions, to be marital assets, and divided as such. The QDRO will give you the option to roll over your portion into your own plan, however, penalty-free and tax-free. 

Know your plan

Each plan comes with its own rules and stipulations. Where some divide earnings by percentage, others divide them by shares. Some plans allow you to pay out your ex-spouse’s portion at the time of divorce, where others may require you to wait until retirement to draw on the funds.

You are the best person to research your plan. It may seem like a lengthy and arduous task, but you can be assured that you have your own best interests at heart.

Whatever your individual plan specifies, it is more than likely that your spouse will be entitled to a portion of your 401K in the absence of a prenuptial agreement. There are a few common settlement options available, including:

  • Keeping your 401K and giving your spouse alternative marital assets of comparable value.
  • Splitting the 401K assets between you and your spouse.
  • Liquidating the portion of your account that meets the QDRO and agreeing on a lump sum settlement with your spouse. 

These tips are a brief overview of the options that may be available to you. The best way to obtain a complete picture in your unique situation is to consult with a local, knowledgeable divorce attorney regarding your 401K. Do some background research yourself as to what your particular plan permits to give yourself better insight into the situation.

For more advice and state-specific information, contact one of our professional divorce attorneys today.