Are you going through a divorce? Are you worried about your 401k? Here’s everything you need to know about 401k divorce distribution.
Around 40-50% of married couples in the United States divorce.
With such a huge number of divorces, it’s important that you understand your rights when it comes to dividing assets. 401k divorce distribution is a common topic that divorcees have questions about.
The account holder should be prepared to know what they will have to pay, and the receiver should be knowledgable about what they are entitled to by law to avoid a messy divorce.
To learn about how a 401k is supposed to be distributed in a divorce, keep reading!
401k Divorce Distribution Requires a Court Order
Distributing a 401(k) during a divorce is not something that can be done amongst the couple alone.
When it comes to 401k divorce distribution, a judge has to sign off on a Qualified Domestic Relations Order. This just confirms that each spouse has a right to the money. This order is also important, as the owner is let off the hook from paying taxes or a fee for early withdrawal once the funds are distributed.
If the account holder also has a pension, there will need to be a separate process for distributing those funds. For each account that needs to be distributed, a separate order will need to be issued.
The orders must also state exactly what each person is getting from the account. This can be in a dollar amount or a percentage.
The Laws for Dividing Assets Differ from State to State
How property and accounts are treated during a divorce will differ depending on which state you live in.
When you file for divorce, you’ll want to know what the laws for your state are. In a community property state, any asset that was gained during the marriage is considered to be owned by both parties. It doesn’t matter who was responsible for funding them.
In this case, each person would get half of the 401(k). There are exceptions to this law, for example, if a prenuptial agreement is signed before the wedding.
In equitable distribution states, the court looks at the status of each party before deciding how to divide assets. Factors like the ability to work for each person, the financial situation of each person, and the length of the marriage are considered. In this case, there is no guarantee that the assets will be divided 50/50.
There Are Options for Distributing Funds
If you are the spouse on the receiving end of the 401(k) distribution, you have three options for how you can receive it.
- Roll them over into your retirement plan
- Defer accepting distribution until the account holder retires
- Cash it out
Each option has its pros and cons and the best distribution method for you will depend on your current financial situation.
Don’t Hesitate to Find Out What Funds You’re Entitled To
It’s important to understand how 401k divorce distribution works because if you don’t, you may be missing out on assets that you’re entitled to.
Reach out for a free consultation, or check out our blog for more legal advice!