8 Empowering Things to Know About Your 401K During Divorce


What’s Going to Happen to My 401k If I Get Divorced? Your 401k may represent the bulk of your retirement savings so the thought of losing any part of it during a divorce can be extra scary.  What will happen to your 401k if you get divorced? Will you have to fork over most of it to your ex-spouse? How will that even work? Is there a way you can save your 401k and your retirement? Let’s look at how your 401k is treated during your divorce and what options you have for protecting this important retirement vehicle. 

1. Yes, Your Spouse Is Entitled to Your 401k

Any money you put into your 401k while you were married qualifies as marital property, meaning that your spouse is entitled to a portion of its value. To be clear, if you had any money in your 401k before marriage, that money is not marital property. As an example, let’s say that Sam had $10,000 in his 401k before he married Maria. Over their marriage, he invested $30,000 into his 401k. Maria would be entitled to a portion of the $30,000 that Sam invested while they were married.

2. The Amount You Owe Your Spouse Depends on Your State

Different states have different rules when it comes to dividing marital property. A small number of states will require you to divide your property equally between both spouses, meaning Sam would owe Maria $15,000 from the $30,000 he put into his 401k. A larger number of states focus on equity. While these states may not require Sam to hand over half of his 401k to Maria, he will still likely have to give her a large chunk of the account.

3. You Can Trade Something Else to Protect Your 401k

While your spouse is entitled to a portion of your 401k, you may be able to keep your retirement account intact if you are able to trade something of equal value to your spouse as part of your divorce settlement negotiations. For example, you may offer to give your spouse a larger amount of equity in the house or money from other investment accounts.

This type of transaction may not be as simple as it seems. Most 401ks are tied to the stock market, so their value fluctuates on a daily basis. It can also be difficult to assess the true value of a 401k. For example, let’s say that Sam owes Maria half of 401k, valued at $30,000. Would giving her $15,000 in cash by liquidating a different investment account be fair? Investment accounts tend to increase in value over the long term, so Sam’s $30,000 could be worth $100,000 by the time he retires. In that scenario, Maria’s portion would have been worth $50,000 instead of $15,000.

When deciding the value of a 401k, it’s important to take into consideration tax implications as well as future growth into the equation.

4. Splitting the Accounts

Another option is to split your 401k and roll your spouse’s portion into a separate account. The benefit of this arrangement is that you can continue to make contributions to your account while your spouse can hold onto their account and begin taking distributions when you retire. In order to move any money in your 401k, you’ll need a special court order called a Qualified Domestic Relations Order (QDRO). This document will instruct the administrator of your 401k to perform whatever actions you need as long as those actions comply with the rules of your 401k plan. 

5. Liquidating a Portion of Your 401k

Liquidating a portion of your 401k to give your spouse their share is not recommended by most financial advisors due to tax liabilities and the loss of future investment growth. However, it may be necessary if your spouse needs the money to pay off debt or to set up their new living arrangements after the divorce. Again, you’ll need to present your 401k administrator with a QDRO in order to receive a distribution from your account. One small silver lining is that pulling money from your 401k as part of a divorce settlement won’t incur an early withdrawal fee. It is important to note that it can sometimes be difficult to withdraw money from your 401k even if it is part of your divorce settlement. You’ll need to follow complex legal requirements to do it.

6. Two 401ks

What happens if you and your spouse both have 401ks or other retirement accounts? The answer depends on the value of each account. If you and your spouse have accounts worth roughly the same amount, the easiest solution is for both spouses to agree to keep their own account. However, if one spouse’s account is much more valuable than the other’s, you’ll still need to determine a way to split the value appropriately.

7. Prenuptial Agreements

Is there any way you can fully protect your 401k? Yes, but only if you and your spouse created a valid prenuptial agreement before your marriage that protects your 401k. Otherwise, any investments you made into your 401k during the marriage are shared marital property.

8. Talk to the Experts

Dividing a 401k can be a highly complex issue. One of the first people you should meet with is your 401k account administrator. This person should be able to provide you with the rules of your plan. For example, some plans will allow your spouse to take a distribution on their shares right away while other plans may require your spouse to wait to take distributions until you retire. Your plan administrator should also be able to give you model copies of QDROs that comply with your plan.

Next, consider sitting down with a CPA or tax specialist to look at the tax consequences of dividing your 401k as well as the rest of your estate. A financial planner and divorce attorney can also help you develop a divorce settlement strategy based on your assets. 

Interested in learning more? At Second Saturday Divorce Workshops, we can help you understand the legal, financial, and emotional consequences of divorce. 

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