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How is a 401(k) treated in a divorce?

On Behalf of | May 19, 2020 | Divorce

California residents need to understand the impact that divorce can have on their retirement assets. If there is no prenuptial agreement that protects your 401(k) account, it is subject to division in a divorce. This means that you may need to readjust your retirement planning based on how much of the account your spouse is awarded.

Is a retirement account subject to division?

A retirement account is considered a marital asset. Even if a person’s account started before they were married, the fact that they contributed to their retirement while they were married makes it an account that is subject to division in a divorce. This includes both your contributions to the account as well as your employer’s matching contribution. The exact amount of the split will be up to the court, but it will consider the amount that you put into the account. This will be an area where the court may credit you if you earn more than your spouse.

The post-divorce division of the account

Once the court has entered an order, the spouse obtains something that is called a qualified domestic relations order, or QDRO. This can be presented to the administrator of the retirement account that informs them of one’s right to a part of the account. Then, there will be some discussion of whether the other spouse will own part of the account or take a lump-sum distribution. If they take the money now, they will need to pay taxes and an early distribution penalty.

The best thing to do is negotiate a solution where you and your spouse will agree on the split of the retirement accounts. If not, the court will enter an order dividing the accounts. A divorce attorney may assist you in the negotiation in order to ensure a solution that balances your interests along with the desire to avoid litigation. If there is no agreement to be had, the attorney may take your case to court.

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