How Are 401(K)s Split in a Divorce?
When a marriage ends, the last thing you want to add to the grief and pain is the stress of paperwork, legal agreements, and dividing up assets. These processes can feel like even more of a burden in the middle of a trying time. But it's important to know how are 401(k)s split in a divorce.
An expert divorce lawyer makes the process easier to handle and gives you valuable advice when it comes to splitting up assets in a divorce, including your 401(k).
What is a 401(k)
A 401(k) is a retirement savings plan offered through an employer. When you sign up for your 401(k), you agree to automatically have a percentage of your paycheck deposited into your investment account each pay period. Your employer can match part or all of your contribution, depending on what they choose.
How Does Marriage Affect a 401(k)
Even when you are married, your 401(k) can only be contributed to by you and your employer, from your paycheck. That means your spouse cannot contribute to yours, and you cannot contribute to theirs. You can, however, name them as a beneficiary which means your retirement funds can be rolled into their IRA in the event of your death.
Knowing this, you may think that your spouse, or ex-spouse, has no legal right to your 401(k). This is not the case. In fact, when you are married, any wealth acquired during the course of your marriage is viewed as combined marital property. That means in a divorce, your spouse can claim up to half of your 401(k) savings made during the marriage but before the separation.
For instance, if you have invested $20,000 over the course of your marriage, your spouse may be able to get up to half of that, or $10,000. If you already had an additional $20,000 in your fund before the marriage, your spouse is not entitled to a portion of that.
How Are 401(k)s Split in a Divorce in North Carolina?
The way in which property is split in a divorce will depend largely on three things: the laws of the state in which you reside and are filing, whether or not you can come to an agreement outside of a court, and whether or not you both have a 401(k).
North Carolina is what’s known as an equitable distribution state. In an equitable distribution state, the court determines how to divide a couple’s assets in a manner that is fair to both individuals by looking at factors like finances, employment, earning potential, and marriage length.
This rule comes into play only if you cannot come to an agreement between just the two of you, and need outside intervention. Even if you believe you can come to a fair agreement without the court, you may still find a financial advisor or the advice of a divorce lawyer helpful.
If you both have a 401(k), you may both decide to maintain your individual retirement accounts to keep things simple, and figure out a different way to make the divorce financially equitable. If you do not decide to do this, it will be up to the court to decide how much of your retirement fund can be claimed by your spouse, or vice versa, to make things fair.
If one of you does not have a 401(k) and the other does, a court can decide how much of the retirement fund goes to the spouse without it.
How Will 401(k) Funds be Distributed
There are a few options when it comes to how these funds can be received.
- Roll the assets over into the other qualified retirement plan: You can do this by simply requesting a direct transfer, and it allows you to avoid having to pay a penalty.
- Defer until the account owner retires: You can wait until the account owner retires and then choose to receive the money in installments or as one lump sum.
- Cash out your portion: This is the most immediate way to gain access to the money, but if you do so before the age of 59.5, you may have to pay income taxes as well as the 10% early withdrawal penalty.
Before you can begin transferring or pulling money out of the 401(k), you’ll need to have a judge issue a Qualified Domestic Relations Order (QDRO) confirming the legal right of each spouse to their portion of the money. This order also prevents the owner of the original 401(k) from having to pay taxes or the early withdrawal penalty for simply allocating the required funds agreed upon in the divorce. A divorce attorney can help you with getting the QDRO from a judge.
Can a Prenup Protect my 401(k)?
If you’re looking for a way to protect your 401(k) funds from being distributed to your ex-spouse, or you’re being proactive before tying the knot, you might think that a prenuptial agreement could prevent someone else from laying claim to your money.
In some cases, that may be true, but you need to be sure your agreement explicitly states your intentions and is in accordance with state laws. An attorney can help you draw up a prenup that meets your needs.
Final Word: How Are 401(k)s Split in a Divorce
North Carolina’s status as an equitable distribution state means that in many cases, if you and your ex-spouse cannot come to your own agreement, the court can decide what an equitable split of your 401(k) funds looks like based on individual factors.
If you are getting a divorce in North Carolina, and are looking for advice on your 401(k) division, you can schedule your free consultation with the experienced and reputable divorce attorneys of Van Camp, Meacham & Newman today.