How to Divide a 401K in a Divorce: A Step-by-Step Guide

certified divorce financial analyst dividing assets in a divorce property division in divorce retirement accounts in divorce
How to Divide a 401K in a Divorce

Dividing a 401k in a divorce can be a complex process. In this guide, we will walk you through the steps on how to divide a 401k in a divorce so you can avoid unnecessary tax burdens.

In general, there is a lot of confusion around different types of retirement accounts. Some people refer to all retirement accounts as pensions or all retirement accounts as 401Ks. Referring to retirement accounts by the wrong account type becomes problematic in divorce cases because the accounts don't all have the same rules, and they need to be correctly identified. If you are not sure which type(s) of accounts you are negotiating, contact a Certified Divorce Financial Analyst (CDFA).

This post is referring specifically to how to divide a 401K in a divorce. A 401K is an employer-sponsored retirement account that is governed by ERISA. The division of a 401K in a divorce is different from how some other retirement accounts get divided. You can see some of my other posts regarding how to divide other types of retirement accounts below.

Related posts: 

How to Divide Assets in a Divorce: 7 Questions to Ask Yourself

What Everyone Ought to Know About Divorce and Retirement Accounts

How to Keep Your Pension in a Divorce

Dividing Pensions in a Divorce: Shared vs. Separate Interest

Clearing Up Misconceptions About Thrift Savings Plans & Divorce

What You Need to Know About a ROTH IRA in a Divorce

Before I get started, if you're curious, yes, a 401K can be divided in a divorce. And it can be divided without significant tax consequences as long as it's handled correctly. While retirement accounts are not always divided in divorce settlements, they commonly are.

Step-by-Step Process to Divide a 401K in a Divorce 

Here's a step-by-step process to walk you through how to divide a 401K in a divorce.

401k divorce

Step 1: Request the necessary documentation for a 401K division

Before you negotiate a division of a retirement account, I always recommend that you get a copy of the most recent account statement, the plan summary description, and written QDRO procedures. 

From the statement, you can determine the most recent account value, including if there have been any ROTH contributions or if all contributions were pre-tax. You can also see the investments held in the account, what portion of the account is fully vested, and if there are any loans on the account. It is also an excellent way to confirm that you are negotiating a 401K account and not some other type of account.

Step 2: Determine the plan for how to divide the 401K account

Reference the plan summary document to determine if the 401K has any limitations in how it can be divided.  The agreed-upon division has to be in line with the plan rules, or the plan will reject the request.

Identify the date of division and the portion that will be distributed. Identify how to handle loans on the account as well as gains/losses from the time of division to the time of distribution. Keep in mind that it is often several months from the agreed-upon date of the division until the distribution.

Determine who will be responsible for the QDRO preparation and who will pay for it. If this is not identified, this crucial step can fall through the cracks.

Step 3: Include the detailed agreement in your Separation Agreement

Make sure that you identify the exact plan name in the agreement. It's common for companies to have more than one plan available to employees. I cannot tell you how many agreements I've seen where the plan name is not correctly identified. If the agreement has the wrong name, it will likely be used in the QDRO, and the plan will reject the document.

Remember to include all the details of your agreement, including who is responsible for the QDRO preparation and its cost, as well as a deadline for completion.

I've had several clients contact me years after their divorce settled about their QDROs because there was no specific timeline identified in their agreement and/or there was no person identified as the responsible party. This can lead to a lot of costly problems.

401k divorce

Step 4: Have a Qualified Domestic Relations Order (QDRO) drafted and signed by the judge

I usually recommend that a draft of the QDRO be submitted to the plan before having the judge sign off on it. QDROs can get kicked back for a variety of reasons, so it's good to get pre-approval before having a judge sign the document.

If you are filing a dissolution, you can have your QDRO prepared before your final court date.  If your case is getting settled at trial, you will likely need to have your attorney return to court to get the judge's signature on your QDRO. Some courts will accept these documents by mail. Check with your local court for the process.

Step 5: Submit the signed QDRO to the 401K plan administrator

Once the judge approves the QDRO, you can submit it to the plan administrator for approval. Remember to retain a copy for your records. When the plan receives the QDRO, they will have an attorney review it for compliance with the plan rules. This can commonly take anywhere from 2-8 weeks.

Follow up with the plan if you don't receive an acknowledgment that they've received the document.  

Step 6: Let the plan know how to handle the distribution of the divided 401K

Different plans have different distribution options available. They will typically send you a form asking how you would like the funds distributed. For example, you might be able to maintain a 401K account at the same plan, or you might be able to roll the funds into an IRA at the same financial institution.

You could also choose to roll the funds over into your own IRA. You may also want to take a distribution from the account if you need some cash or you want to pay down some marital debt. Remember that distributions received directly from a 401K as assigned by a QDRO avoid the 10% tax penalty for early withdrawal (before age 59.5).

If you are taking a portion as a cash withdrawal, I cannot recommend enough that you have a professional assist you with this. There is a right way and a wrong way to handle it, and the wrong way can be very costly. It is well worth it to make sure you handle this correctly.

Related post: 401K in Divorce: A Tip That Can Save You Thousands

How to Protect a 401K in a Divorce

While retirement accounts earned during the marriage are considered part of the marital estate, the portion of the account obtained before the marriage could be regarded as separate property. Also, the laws around the growth and earnings on the separate property vary from state-to-state, but that could be considered separate as well. If you are trying to make a separate property claim, start gathering documentation so you can prove it.

Related post: What is considered separate property in a divorce?

If you can't make a separate property claim but are still wanting to protect your 401K in your divorce, consider other assets that you would willing to give up in exchange for your 401K. For example, would you be willing to give up another retirement account or the primary residence or some other asset to keep your 401K intact?

In conclusion, navigating the division of a 401k in a divorce can be a challenging process, and it's crucial to approach it with care and expertise. By following the step-by-step guide provided here, you'll be well-equipped to handle the complexities involved. However, if you still have questions or seek personalized guidance tailored to your unique situation, don't hesitate to schedule a call with our team of experienced professionals. We understand the intricacies of divorce and the financial aspects involved, and we're here to provide you with compassionate and knowledgeable assistance. Reach out to us for a consultation, and let us help you achieve a fair settlement and a secure financial future.

Schedule your call today and gain peace of mind during this critical time.


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