During your divorce, the division of retirement accounts, including 401(k)s, involves particular tax implications and court rulings. It can usually get complicated without proper planning, especially if you and your spouse aren’t willing to come up with an agreement.
Generally, your spouse has access to your retirement funds through marital share. However, there are also ways for you to protect your financial assets and to cut clean ties with your spouse without breaking the law. You’ll more likely need a legal advisor to help point you in the right direction and get through the process smoothly.
Primary Things to Consider During a Divorce
First, you have to consider establishing a strategy on how you want to proceed with the divorce, particularly how to divide your retirement savings. There are primarily two ways to move forward: either you come to court or settle under legal terms.
Spouses looking to settle their financial assets are not strictly bound by court procedures. A quicker and less confrontational route is by negotiating with your spouse and dividing your marital assets with the involvement of your legal advisors/representatives. If both parties cooperate in the process, you can settle with a legal agreement and let the court review the settlement to come up with a decision based on fair judgment.
Another way to resolve the financial aspect of your divorce is by proceeding to court. If you have a prenuptial agreement regarding your 401(k) and other retirement funds, it’s best to appeal it to the court and follow the legal process. However, if you don’t have a prenuptial agreement, your spouse will most likely claim a portion of your retirement funds, depending on the state law.
Are My Retirement Assets or Benefits and 401(k) Part of Marital Property?
Unless it is stated otherwise in your prenuptial agreement, all your income, assets, and benefits acquired after filing your marriage certificate are more likely part of marital property. Therefore, they are subject to division whenever you decide to get a divorce, but of course, with specific conditions provided by the state laws.
Does My Spouse Automatically Get 50% of My IRA, Retirement Accounts, or Retirement Savings?
Your spouse won’t automatically get 50% of your retirement funds. It generally depends on the state laws. Take note that most states follow equitable distribution laws. Meaning, marital property is divided “equitably” but not necessarily equally.
Dividing 401(k) & Retirement Plans in California
In California Law, marital assets and retirement plans must be divided in half. This state community property rule means that the non-participating spouse shall receive 50% of the retirement plan value accumulated during the marriage. The rule pertains to employment-based retirement plans such as individual retirement accounts (IRAs) and simplified employee pension (SEP-IRAs), private employer plans like traditional IRAs and Roth IRAs, and retirement plans financed by family-owned businesses.
It is recommended that before you move head-on with the divorce process, you might want to check with your financial advisor or lawyer and pension and benefits administrator to review your retirement accounts, life insurance policies, credit cards and debts, and other legal documents (i.e., prenuptial agreement and last will). You also have to consider your retirement accounts issues like the following:
- Rollover accounts
- Stocks or other payouts
- Savings accounts and additional retirement funds
- Income taxes, tax-free income, and your tax bracket
Your divorce attorney should be able to help you with where you should stand after taking a careful look into these documents.
In some cases, the courts can order either party to cover costs related to the divorce. This could include paying for spousal support, attorney fees, court costs, and more.
It would be best if you considered how to protect your 401k in a divorce case since the courts often incorporate any agreed obligations or promises when determining who gets a certain amount from a retirement plan.
How Can I Protect My 401(k) in a Divorce?
The best preventive measure you could do beforehand to protect your 401(k) benefits plan is to construct a prenuptial agreement. A prenuptial agreement should contain a statement of purpose that explicitly states how the assets and liabilities will be divided between the spouses if the marriage is terminated.
However, if it’s too late for that, you can negotiate with your spouse on how you can fairly divide your assets so that the divorce wouldn’t have to affect your retirement plans badly, mainly if you’re solely relying on your 401(k).
What Happens If You Hide 401(k) Assets From The Court
Hiding financial assets during a divorce might put you in the wrong place if the court finds out about it. Even though the law does not particularly state that it’s illegal to hide assets, what makes it unlawful is if the court requires you to present the truth and you fail to do so. For example, if the court asks you to provide all necessary information to support your divorce case, you would commit perjury if you hide a retirement account or any information on your financial status and resources.
Perhaps, even if you dispose of your marital assets and empty your accounts, you would still be liable to pay for any amount granted to your spouse once the court rules the marital share. Besides, even if you decide to cash out your 401(k) before it matures, you’ll have to pay the penalty fees plus income tax.
What is a 401(k) Divorce Cash Out?
401(k) cash out is an early withdrawal from your retirement plan. Regularly, cashing out from your 401(k) before the age of 59 ½ involves a 10% penalty. However, early 401(k) withdrawals can be made as part of a divorce settlement without being charged by this fee but would still be taxed accordingly based on your income tax rate. You only have to follow specific rules involving a Qualified Domestic Relations Order (QDRO).
The QDRO provides administrative guidelines on how to pay the non-employee spouse with their benefits share. It is issued by the court, but your attorney should be the one to draft the terms stated in the QDRO.
Consult an Attorney Specializing in California Family Law
Do you want to achieve the best outcome of your divorce? Choose our award-winning, comprehensive, and highly personalized approach to family law matters with a proven track record of successful and satisfying results. Contact the Law Offices of Leon F. Bennett today for a consultation!