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401k considerations during divorce

Posted On March 24, 2020 In High Asset Divorce

As people enter into divorce proceedings in Gilbert, they understand that there will be many assets that they will have to divide between themselves and their ex-spouses. Many, however, feel blindsided the fact that their 401k falls among them. 

In any circumstance, the contributions made to a 401k during a marriage are likely to be among their larger assets dealt with during property division proceedings. How much one has to give up depends largely on the course of action they elect to pursue. 

Dividing up 401k contributions 

According to the website, 401k funds are typically divided in a divorce by the court issuing a Qualified Domestic Relations Order authorizing disbursements to an alternate payee in the form of a rollover into another retirement account. In some instances, the divorcing couple chooses to divide the original 401k into separate accounts (with each party controlling their respective share); in others, the non-contributing spouse may elect to have their portion of funds rolled over into a separate IRA. One does have the option of taking an early disbursement without incurring a penalty (divorce is one of the few exceptions where this is the case), yet that could potentially be foregoing significant growth that those funds could experience by leaving them in a retirement account. 

Keeping the entire 401k 

For those who do not want to give up any portion of their 401k, the 401k Help Center suggests relinquishing their claim to another marital asset of comparable value in exchange for keeping the full amount of their 401k. One should know, however, that “comparable value” in this case depends on the estimated future value of the assets the other is being asked to give up, meaning that the requestor might have to give up their stake in an extremely valuable asset right now.