Divorce and Retirement – Options For Your 401k Plan

Divorce presents many financial challenges. If you’ve acquired significant 401k funds during marriage, your retirement account may be at the center of your divorce. Determining how to equitably divide these benefits often lies at the heart of a settlement agreement, as each spouse has the legal right to claim a “community interest” in 401k benefits acquired during a marriage, even if they were acquired solely through the effort of one spouse.

Know Your Options:

When deciding how to divide a 401k with your soon-to-be ex, start by discussing options with your plan administrator. Each plan has its own set of administrative rules. While some plans divide earnings by percentage, others divide by shares, and while some permit a distribution of a portion at the time of divorce, others require participants to wait until retirement. Its important to note, any withdrawal from a 401k before retirement generates tax(es) and penalties which often take a large portion of any amount withdrawn.

The Equitable Split – Four Common Options

Option 1:

• You keep all your 401k, and your spouse takes other marital assets of comparable value.

Option 2:

• You and your ex-spouse split the 401k assets equally, be sure to check with your plan administrator.

Option 3:

• Withdraw the portion of the plan needed to satisfy the other party’s community interest in the 401k and give your spouse a lump sum. Keep in mind that taxes and penalties may diminish the amount withdrawn, thus this is probably the least desirable option for you and your spouse.

Option 4:

• Roll over a portion of the 401k awarded to the ex-spouse into another tax-deferred account. A rollover permits removal of your ex’s share without penalty or tax liability. It also gives your former spouse an opportunity to choose from a wide array of investment choices. Check with the plan administrator if this is an option.

Although these four options seem relatively straight forward, you should always consult with a family law attorney to ensure your retirement and all other marital assets are properly valuated and divided so you don’t face an uncertain financial future.