Protecting a 401(k) during divorce proceedings

On Behalf of | Jun 25, 2024 | Divorce

Personal resources and marital property may be at risk during a divorce. People may have to liquidate some of their assets to pay for divorce expenses. They also have an obligation to divide their property with their spouses. Unless people have marital agreements in place, they have to address property division after they make the decision to divorce.

Some resources are more likely to trigger anxiety in individuals and cause conflict between divorcing spouses. Resources with high overall values and a direct connection to future financial stability are typically focal points during divorce.

Those with successful careers often set aside some of their income in 401(k)s. These special tax-deferred retirement accounts allow people to diminish their taxable income while making contributions and give them capital to rely on during their retirement years. Protecting a 401(k) is potentially a major priority during a divorce. How can people go about protecting their retirement savings?

By making other concessions

To retain a particular high-value asset, someone has to give up other resources of comparable value in most cases. If both spouses have 401(k)s, they could potentially both keep their separate accounts. Other times, only one spouse has a 401(k). They may have to give up their claim to other property or agree to take on more marital debt in return for retaining the 401(k) in its entirety. People can often prevent the division of a 401(k) with careful planning and negotiations.

By using the right tools to split the account

Sometimes, actually dividing the 401(k) is the simplest and most effective solution. People worry about splitting retirement savings accounts in part because they could be at risk of penalties and taxes. Using a qualified domestic relations order (QDRO) to divide a 401(k) can help people avoid the 10% penalty that they might otherwise need to pay. By keeping the funds in two separate 401(k) accounts, spouses can prevent any tax consequences that might come from an actual withdrawal.

The best solution for any particular situation depends on the nature of the marital estate, the age of the spouses and other unique factors. Developing strategic goals while preparing for property division in a complex divorce case can benefit both spouses, as people who focus on specific resources may feel more satisfied with the outcome of a divorce process than those whose expectations aren’t realistic.