How Can I Protect My 401(k) Assets in a Divorce?

The divorce process can take a major financial toll when it comes time for you and your spouse to divide your marital assets. You may be surprised to learn that any contributions during your marriage made to your 401(k) plan are considered marital property, which means it will be subject to division in a divorce. However, there are steps you can take to protect your financial interests and ensure that all marital assets are distributed fairly and equitably. A skilled family law lawyer will assist you with this process, identify any assets that are not subject to equitable distribution, and ensure that your 401(k) is protected as much as possible.

What Are the Different Types of Property Division?

Depending on where you live, there are two types of property division: community property division and equitable distribution. If you live in a “community property” state, all assets that were acquired over the course of the marriage are divided equally between both spouses if the couple divorces. This includes retirement accounts like 401(k) plans and pension plans. If you live in an “equitable distribution” state, the court will divide the marital property in a way that the judge deems to be equitable and fair. Depending on the circumstances, the marital assets may be divided equally, but that is not always the case. New Jersey is an “equitable distribution” state, as are the majority of states in the U.S. 

How Are 401(k) Assets Divided During a Divorce?

Before the assets are divided, you and your spouse will need to get an accurate idea of how much you both have. You can do this by getting a summary plan description (SPD) of your 401(k), and any other retirement accounts you have. Your plan administrator can assist you with this, and discuss any specific rules that may apply to your particular plan. All funds contributed to your 401(k) account over the course of the marriage are subject to division, unless a valid prenuptial agreement is in place. Any funds that accumulated prior to you getting married are considered separate property and are not subject to equitable division. If both you and your spouse both have a 401(k) or a pension account that is worth a similar amount, you may both agree to keep your own accounts. However, if one spouse has significantly more money saved in a 401(k) account, the court may order that person to pay a percentage of the earnings to his or her spouse in the divorce settlement.

When dividing the assets, there are other factors to consider as well, including how the funds are taxed by the government. For example, traditional 401(k)s are tax-deferred, which means that you owe taxes on your distribution. However, a divorce is one of the rare instances where you may access your 401(k) early without any tax penalty. Oftentimes, people who are going through a divorce use the cash from a lump sum payment to pay for a down payment on a new house or to cover living expenses while they look for a job. Changes in the stock market can also impact the value of the 401(k) account as investment accounts are tied to the stock market. It is important that the language in the divorce decree is very specific, and addresses this issue.

How Do I Avoid Losses to My 401(k)?

In order to avoid paying costly fees and taxes, it is very important that you file all of the necessary paperwork and specify how you plan to divide your assets. In most cases, any withdrawals that are made from a 401(k) before turning 59 ½ are subject to a 10 percent penalty tax by the Internal Revenue Service (IRS). However, distributions that are made during a divorce are generally exempt from this penalty. In addition, all proceeds from an eligible retirement plan that are rolled over to another plan during a divorce are not subject to penalties or income tax obligations, provided the funds are rolled over to the other retirement account within 60 days of distribution. You may also be able to avoid distributing a percentage of your 401(k) funds if you can offer your spouse another marital asset that has equal or comparable value, like the family home. If your spouse agrees to this, your 401(k) plan will remain intact. 

However, if you and your spouse agree to divide your 401(k), you will need a qualified domestic relations order (QDRO), which tells the plan administrator how to pay your spouse his or her share of your plan’s benefits. 

What Do I Need to Know About the QDRO?

QDROs are used in all divorce proceedings where all or a portion of a participant spouse’s retirement account is distributed to the non-participant spouse. The document instructs the retirement plan administrator to distribute the agreed upon amount to the plan holder’s spouse. The non-participant spouse’s attorney will prepare the QDRO, including the percentage of the account that the spouse is entitled to receive. Once both spouses have approved the QDRO, they must sign the document and return it to the court for the judge’s approval. When the QDRO has been signed by the judge, the attorneys can mail the document to the plan’s administrator.  The funds are provided via a check or a wire transfer. It is very common for the non-participant spouse to roll their portion of the assets into a new 401(k) account. A dedicated family law lawyer can assist you with this process and ensure that you are making the best financial decision.

QDROs can only be used to divide the following types of plans:

  • Defined benefit plans: These are also known as pension plans. Oftentimes, the employer provides this plan as part of a compensation package. Upon retirement, the employee will receive a monthly check which he or she will likely continue to receive until death.
  • Defined contribution plans: With this type of plan, the employee and the employer contribute to the plan, and the value grows over time. The plan holder has access to the funds upon retirement, and any early withdrawals are subject to penalties. A 401(k) plan is an example of a defined contribution plan. 

Can I Change the Beneficiary of My 401(k) Plan?

When you sign up for a 401(k) plan, you will be asked to designate a beneficiary: the person who will have legal access to those funds when you pass away. If the participant does not assign someone as the plan’s beneficiary, his or her spouse is generally designated by default. If you are going through a divorce, and want to name someone else as the plan’s beneficiary, your ex-spouse will need to approve those changes and sign away their rights to those funds. It is important that this is taken care of during the divorce proceedings, as it will prevent you from having to resolve this matter months or even years after the divorce has been finalized.

Is It Illegal to Hide Assets During a Divorce?

You may be tempted to try to hide your 401(k) assets in order to prevent your spouse from having access to those investments that you have accumulated over the years. If your divorce is particularly contentious, you may feel very strongly that your spouse should not be entitled to any of your financial assets. Before you even consider trying to hide assets, including funds that you have accumulated in your 401(k) plan, it is important to understand that not only is this a bad idea, it is illegal, regardless of how unfair you think the arrangement is. You will be required to provide all relevant financial information to your spouse during the discovery process. You may also be deposed, in which case you will have to provide testimony – under oath – about all of your assets and marital property. If it is discovered that you lied about assets, you could face a perjury charge. You could also be held in contempt of court if you do not share account balances that were ordered by the court. If you are found in contempt of court, you could face a jail sentence. Your family law lawyer will protect your interests and your financial assets throughout the divorce process.

Somerville Family Law Lawyers at Lyons & Associates, P.C. Protect Clients’ Financial Assets During a Divorce

If you and your spouse are going through a divorce, and you have questions about how to protect your 401(k) and other financial assets, contact the Somerville family law lawyers at Lyons & Associates, P.C. To schedule a free, confidential consultation, call us today at 908-575-9777 or contact us online. Our offices are located in Somerville, New Jersey and Morristown, New Jersey, where we serve clients throughout New Jersey.