Am I Entitled to My Spouse’s 401(k) in a Divorce?

One of the most financially responsible things you can do as you enter the workforce is to start saving for retirement. For many people, that means participating in their employer’s 401(k) plan, where employees contribute a portion of their pre-tax income to the plan, and those contributions are invested in mutual funds. Over the years, earnings continue to grow until the employee reaches retirement age.

If your spouse has participated in a 401(k) plan throughout your marriage, this will likely represent a significant asset if you and your spouse file for divorce; these funds may be divided as part of the divorce settlement. However, several factors will impact how a 401(k) account is divided and the percentage of the plan you are entitled to receive. A skilled lawyer will walk you through the divorce process and ensure that your legal and financial rights are protected.

How Is a 401(k) Divided in a Divorce?

The distribution of marital property generally applies only to marital property, such as real estate, businesses, stocks, bank accounts, and retirement assets, including 401(k) accounts. However, some circumstances can complicate this process. For example, if your spouse began contributing to a 401(k) plan several years before you married, the account’s value from when your ex started contributing to the date you were married may be considered separate property. It will then be subtracted from the value of the account over the course of your marriage.

For tax purposes, 401(k) plans are considered qualified plans. They can only be divided through a Qualified Domestic Relations Order (QDRO), which instructs the plans administrator to disperse a percentage of the funds to you. The plan administrator will not distribute the funds without a QDRO that a judge has signed. An experienced divorce lawyer will explain the terms of the QDRO and send it to the plan administrator, who must approve the order and distribute the funds. In some cases, the plan administrator may reject the plan and provide reasons for the decision. The parties involved must make the necessary changes and resubmit it for approval.

How Long Does a QDRO Take?

If no errors or details need to be changed, a QDRO can take between two to three months from the time it is drafted to when it is executed. The process can last for several months or even years if submission errors need to be corrected and re-reviewed. You and your spouse should have your divorce lawyer review the QDRO to ensure you comply with the retirement plan requirements.

Once you agree to the terms, you will submit it to the court for signature and filing. A certified copy of the signed order is sent to the 401(k) plan administrator, who will issue an approval letter. The funds will be sent to your account within five weeks of approval. You can receive the funds as a cash distribution or roll over the funds into another 401(k) account or an individual retirement account (IRA).

How Do State Laws Impact Property Division?

State divorce laws will also determine how funds from a retirement account, like a 401(k) plan, will be distributed. For example, all marital assets are automatically split 50-50 in community property states. New Jersey is an equitable distribution state, which means that the funds will be distributed in a manner deemed fair but necessarily equal. A judge will consider a range of factors when making this decision, including your financial situation, the length of your marriage, and your ability to earn an income.

Often, rather than divide a 401(k), couples will make trade-offs during settlement negotiations. For example, if you and your spouse have your own 401(k) accounts with similar value, you may agree that you will keep them. If you do not have a 401(k) plan, but your spouse does, you may agree to let your spouse maintain the 401(k) account.

Are There Tax Penalties Associated With Dividing a 401(k)?

There are potential tax consequences that you should be aware of if you are in the process of negotiating a divorce settlement. If you are receiving funds from your spouse’s 401(k) as part of the divorce settlement, you may choose to have the funds rolled over to your retirement account. This will help you continue to build your retirement nest egg while avoiding paying taxes on the money now. However, if you are in a situation where you need to cash out your share of the 401(k) immediately, you will have to pay income taxes on that money. You may also have to pay a 10 percent early withdrawal penalty if you are under 50 ½. You can avoid paying that penalty if you get a direct distribution with a valid QDRO from your spouse’s 401(k) plan. Discussing your options with an experienced lawyer who thoroughly understands the tax consequences of dividing a 401(k) during a divorce is highly recommended.

What if My Spouse Tries to Cash Out a 401(k) During the Divorce?

If your divorce becomes contentious, you can consider filing a temporary restraining order (TRO) to maintain the status quo until the divorce has been finalized. This will prevent you and your spouse from being able to transfer, sell, or dispose of assets in some other way without the other spouse’s written consent or court authorization. Your divorce lawyer may assist you with this process. If your spouse withdrew all or a significant portion of their 401(k) during the divorce proceedings, the court may require them to reimburse those funds to meet the divorce settlement.

Hiding assets is another step that some spouses take to protect their financial interests and prevent their spouse from having access to a percentage of those assets. Keep in mind, however, that if you believe your spouse may try to hide assets, including funds in a 401(k) account, they could face serious legal consequences. During the divorce process, you and your spouse must submit detailed financial records, including bank accounts, retirement accounts, other investments, and all debt. If you discover that your spouse signed the financial forms but intentionally did not include a 401(k) as an asset, they could be charged with perjury.

Somerville Divorce Lawyers at Lyons & Associates, P.C. Negotiate the Best Possible Financial Settlement for Divorcing Clients

If you are in the process of divorce and have questions or concerns about whether you are entitled to a percentage of your spouse’s 401(k), do not hesitate to contact our Somerville divorce lawyers at Lyons & Associates, P.C. To schedule a free, confidential consultation, call us today at 908-575-9777 or contact us online. Located in Somerville, Morristown, and Freehold, New Jersey, we serve clients in Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, Morris Plains, and Monmouth County.