You have spent years working at the same firm, contributing a significant amount of your salary to the company-sponsored 401(k) retirement plan. You dutifully began those investments as soon as you were eligible and well before you were married.
During the following years, you got married and continued making 401(k) contributions, watching that investment grow. But, in time, your marriage crumbled and heads toward divorce. What will happen to your 401(k) fund during the discussion on property division? Ideally, you hope to protect as much of it as possible.
Offer assets in the equivalent amount
A major goal when it comes to dividing assets within a 401(k) is to minimize any taxes and fees, otherwise your retirement savings will get set back even further.
But you also should understand that your former spouse will have access to a portion of your 401(k) — the contributions and earnings that occurred during your marriage. These are considered marital assets.
One way to protect your 401(k) is to offer your estranged spouse other marital assets – such as a home, cabin or motor vehicle — that have an equivalent value.
For example, say that the judge ordered you to provide $250,000 of 401(k) funds to your spouse. As long as you successfully negotiate, it may be possible for you to keep those retirement funds untouched if you agree to provide your spouse with $250,000 in other assets.
A qualified domestic relations order
If there is no other choice but to provide a portion of your 401(k) to your spouse, you will need to rely on a qualified domestic relations order (QDRO). To get this document drafted, you must enlist an attorney who has training in working with QDROs.
With a QDRO, a portion of the 401(k) will be extracted from the account and provided to your former spouse.
Realistically, a QDRO is likely the best option. An alternative to a QDRO is to withdraw funds from your 401(k) and provide that money to your former spouse. However, you will receive a tax- and fee-related penalties if you do this and are younger than 59 ½.
But, as part of the divorce agreement, you could specify that your former spouse would be responsible for paying those taxes and fee.
Understand your plan, avoid complications
Make sure to understand what your 401(k) plan will allow and avoid complications by making unnecessary steps. Property division in divorce cases may turn complicated, especially when a great amount of assets exists.