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.
Valuing and dividing retirement accounts is more complex than most divorcing couples expect. Below are five common questions we receive regarding divorce and retirement accounts.
Imagine that only one spouse worked for most of the marriage while the other cared for the kids. If that's the case, most of the retirement assets are likely only in one spouse's name. It is common for clients who own retirement accounts to believe that they are entitled to the entire account since it's in their name. However, money earned during the marriage is a marital asset and subject to division in a divorce.
In contrast, retirement assets earned prior to the marriage are typically considered separate assets and not subject to division in the divorce. In addition, the growth on those separate assets during the marriage is considered separate property. For an accurate appraisal of what portion of a retirement account is...
It is common for one partner to handle all of the retirement accounts in a marriage. In fact, I get calls all the time from individuals who are extremely frustrated. After they've been divorced for over a year, they still have not moved all the relevant accounts into their own name. There is often a lot of confusion around this issue.
With respect to receiving a portion of an ex's 401(k), here's the first question:
One of the biggest mistakes that a person can make after a divorce is not following up on the QDRO. I really encourage clients to have the QDRO drafted prior to their final court appearance if at all possible. That way, it can be signed by the Judge and submitted to the plan administrator right away. Keep in mind each plan has its own QDRO...
Most of the time, when I sit down with couples preparing to dissolve their marriage, individuals assume that each account will be divided in half. Did you know that's not always the case? In states like Ohio, where the law requires an equitable distribution of assets in a divorce, it's important to remember that equitable is not always equal. If you have options, how do you determine which assets to keep in a divorce? Rather than ramble on about all of the issues to consider, let's take a look at an example of a couple with whom I recently worked. I will refer to them as Michelle and James and have tweaked the details so as not to divulge their confidential information.
James and Michelle were married for the last 18 years. Michelle is a teacher who has worked in a local Ohio public school district for 23 years. James has a job in IT in the private sector and has worked at various companies throughout his career. He has been with his...
I often have clients come in who are misinformed about separate property and which assets should be divided in their divorce. Since I'm in Ohio, I will use that as my example. Ohio is an equitable division state. That means that a couples' marital assets are divided equitably in a divorce. It's important to note that equitable is not always equal but I will come back to that in another post. The question, however, is what constitutes a marital asset. All else would be considered separate property.
I hate gender stereotypes but I see this all the time so I think it is worth calling it out. I have never once had a man come into my office and say, "She can keep her pension, she earned it" while I frequently hear from female clients, "He can keep his pension, he earned it." I'm hoping others working in the divorce field have not had that same experience.
The pension is commonly the largest asset of the marriage. If all or a portion of the pension was...
Unfortunately, going through a divorce leads many people completely cash-strapped. While not ideal, if you have not built up enough liquid savings, you might be considering a withdrawal from a 401K. Here is an important tip you need to know about a 401K in divorce. This only works if you are awarded all or part of your spouse's 401K. It does not work on your own.
When you file the Qualified Domestic Relations Order (QDRO) to have all or part of your former spouse’s 401K distributed to you, you have an opportunity to take cash out of the account without paying the IRS’s 10% penalty (on funds withdrawn before age 59.5). To take advantage of this, when dividing a 401K in divorce, have the portion you need, paid directly from the account to you.
Related post: QDRO: I need a what??
Related post: Should I leave my Ex's retirement as is?
It does not need to be the full amount that you are receiving. Do not roll it into an IRA and...