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In a divorce, assets produced or acquired during the marriage must be divided equally, including retirement assets, such as a 401(k) plan. However, that does not necessarily mean all of your 401(k) will be chopped in half. Only the funds you contributed to the plan from work during the marriage are considered community property and therefore divided. Contributions made before marriage or after separation belong to the contributing spouse as his or her separate property. If your spouse is the holder of a 401(k) plan or any retirement plan, one of the most important steps to preserve your community property interest in that plan is to join the plan to the dissolution action. This prevents the spouse named on the plan from borrowing against or draining the account of your interest before it has been divided.
401(k) and Divorce
Dividing retirement assets is one of the most complicated matters in a divorce due to the tax implications and the unique laws and rules that apply. Moreover, retirement accounts are tied to the stock market, which means their values are constantly changing. Furthermore, with a 401(k), unlike a pension plan, a spouse may contribute variable amounts with each pay period, so we cannot just assume a certain percentage of it, based on a time formula, is community property. Good recordkeeping helps minimize the costs of calculating the community property calculation, which in some cases requires an actuary.
If you are determined to protect your 401(k), you have another option that may allow you to hold onto it. Offering your spouse something of equal value, for example, can ensure that these retirement funds will stay right where they are. However, keep in mind that the 401(k) may not have yet vested and its value is future speculation, not the same as present-day dollars and cents. If your spouse does not agree to this, however, you will need a Qualified Domestic Relations Order (QDRO) to divide your plan without incurring penalties and taxes.
If you are receiving funds from your spouse’s 401(k), you can rollover funds into your own 401(k) plan to avoid penalties and taxes. You can keep the funds invested and withdraw them once you reach the age of retirement. Unless you absolutely need access to the money now to cover living expenses or to buy a new home, it is best to hold off on cashing out.
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The divorce process can be incredibly complex, especially when spouses must divide retirement assets. At Kraft Miles, A Law Corporation, our divorce team has the skill, insight, and knowledge necessary to effectively guide you through this emotionally charged experience while protecting your assets. Our attorneys are backed by more than 60 years of combined legal experience and commitment to providing personalized solutions and superior customer service.
Get started on your case today by reaching out to our team at (818) 462-5076 to set up a ca review with an experienced divorce attorney and learn more about what we can do to assist you during this trying time.