Property division can be one of the most complicated and frustrating aspects of divorce. Unless spouses have a pre-existing agreement with one another, they have to negotiate financial matters during the divorce or wait for a judge to divide their property.
Most people preparing for divorce worry about the impact of dividing critical assets. The spouses may have saved throughout the marriage to fund a 401(k). A tax-deferred retirement savings account offers income tax benefits and may lead to employer-matching contributions that increase retirement resources.
Do people with 401(k)s need to worry about dividing them when they divorce?
The account may be marital property
Depending on when a spouse started their 401(k), its contents could very well be marital property. Even if they started funding the account before getting married, the contributions secured during the marriage are subject to division when they divorce.
If spouses split a 401(k) before they reach retirement age, they may need to have an attorney draft a qualified domestic relations order (QDRO). Properly submitting that document to the account manager can protect people from early withdrawal penalties and income tax consequences.
However, it is not always necessary to divide a 401(k) even if it is marital property. Spouses can use the value of the account to balance out other terms set regarding marital assets and debts.
Establishing clear priorities for property division proceedings can help people preserve their most important assets and rebuild after a divorce. If preserving a 401 (k) is a top priority, then the spouse hoping to retain their retirement savings may need to discuss their options with a divorce attorney.