What happens to 401(k) funds when a couple pursues divorce?
State laws vary, but typically any funds that were contributed to a 401(k) during a marriage are considered joint property, barring a prenuptial agreement stating otherwise (length of marriage is not a factor). Assets in a 401(k) account are split during a divorce, in some percentage form. This process requires filing a Qualified Domestic Relations Order (QDRO).
What is a QDRO (pronounced qua-dro)?
A QDRO is a court order that outlines when and how a 401(k) provider is required to split the assets in a 401(k) account during a divorce or marital separation.
It contains the following information: your name, your former spouse’s name, and the amount they’re receiving, which can be listed as a flat-dollar amount or a percent of your balance as of a certain date.
A QDRO transaction fee: With many 401(k) providers, a QDRO can come with a hefty transaction fee ($200-500 or more), charged to the account holder (unless otherwise specified).
If a market fluctuation changes the value of your account between the date on the QDRO and the date that the assets are to be split, the language written in the QDRO is applied. Many people prefer to use a percent rather than a flat-dollar amount, in case the account drops in value and is no longer able to support a split as outlined in the document.
In lieu of splitting a 401(k), another joint asset of equal value can be given to the former spouse, that way the 401(k) stays as is.
Can I still contribute to my 401(k) when going through a divorce?
Yes, you can continue to make contributions, receive employer matching contributions, and change your investment allocations.
Example: If you were married for five (5) years and contributed $10,000 to your 401(k) during that time, then your former spouse would be entitled to half of that amount – $5,000 plus the appreciated value.
Many prefer to use a percent rather than a flat-dollar amount, in case the market fluctuates and your account drops in value. If it did, the specific dollar-value outlined in the document may not be available.
What is my former spouse able to do and when?
Your former spouse will have their portion of funds, which they can move to another qualified retirement plan, such as an IRA, or cash out (aka take a distribution). If they choose that last option, it will come with a hefty tax penalty from the IRS.
In order to move funds into another retirement account, your former spouse must provide their new investment provider, account number and mailing address for the financial provider.
How does a divorce affect my retirement benefits, including Social Security?
If you were married for at least 10 years, your former spouse can file for Social Security based on your earnings history provided they meet the following criteria (even if you are remarried):
- Your former spouse is unmarried
- Your former spouse is age 62 or older
- The benefit that your former spouse is entitled to receive based on their own work is less than the benefit they would receive based on your work
- You are entitled to Social Security retirement or disability benefits
What is my former spouse able to do and when? Your former spouse will be entitled to their portion of funds, which they can move to another qualified retirement plan, such as an IRA, or cash out (aka take a distribution). If they choose that last option, it will come with a hefty tax penalty from the IRS.
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