Do I Have to Split My 401k in a Divorce?
Unless you have a prenuptial agreement stating otherwise, all contributions to a 401k made since your wedding day and any interest or accrual since then are considered Marital Property. Therefore, that money is considered a part of the assets and liabilities to be divided in a divorce settlement. Pennsylvania is an Equitable Distribution state, which means that if your divorce goes to court, the judge will divide your marital assets and liabilities in whatever way the court deems “equitable.”
Options in dividing your 401k
Any contributions and growth prior to your wedding day are yours and yours alone. So the portion that is considered a marital asset is only that which has been added or has grown since you got married. You have several options to consider.
Bargain: In exchange for the portion of your 401k that your spouse is legally entitled to, you can offer other marital assets of equal value. This may seem a simpler option, but calculations can be tricky. You’ll need to calculate the likely value of your 401k at retirement less the taxes you will have to pay on withdrawals since it has grown in pre-tax dollars.
Split: You may offer other marital assets plus a smaller portion of your 401k, or you may just come up with a split that is agreeable to you both. This division requires your lawyers to write up a Qualified Domestic Relations Order (QDRO) that the judge signs, which tells your plan’s administrators to distribute funds to an alternate payee (your ex). This needs to be written very carefully, with the rules of your plan in mind, or the plan administrators will reject it and send you back to your lawyer for a rewrite.
Payout: You may liquidate a portion of your 401k to pay your spouse in cash. While there are circumstances that make this the best option, usually if you are under 59 ½, the tax consequences and penalties make this a poor choice. Make sure your QDRO specifies that if you split your 401k and your ex chooses to liquidate, your ex pays the taxes and penalties, not you.
Do nothing: If both you and your spouse have 401k’s that have grown since you’ve been married, while technically you are each entitled to an equitable share in the other’s 401k, you may just decide that you each keep your own.
What you can do to protect your assets
Taking money out of your 401k before or during the divorce will not protect your assets, and it does not lessen the amount your spouse is due. Rather, you will have to pay back the portion you removed that the court considers your spouse’s property. An experienced divorce lawyer can advise you on the proper handling of your 401k during your divorce.
It’s very important that you secure an attorney who understands the pitfalls involved in dividing a 401k or coming up with an equitable alternative. The calculations can be very complex, both for dividing the fund and for negotiating a different option.
It’s also critical that the QDRO be written following the rules and regulations of your particular plan as well as taking into consideration the particular laws of the state. Repeated rejection by the plan’s administrators can be very costly in legal and court fees, not to mention delaying the divorce settlement.
Contact us at the Law Office of Elissa C. Goldberg to see how we can help you find the best option to preserve your nest egg.