What Will Happen to My 401K During a Divorce?
When you get married, you do so with the full intention of spending the rest of your life with your chosen spouse. Unfortunately, it’s not uncommon these days for marriages to end in divorce, and when this happens, marital property must be divided. In Michigan, this division, by law, must be fair and equitable.
During the division of assets, you and your spouse will be required to list any and all marital assets for consideration, including common assets like a home, cars, bank accounts, and other items of monetary value. Does your 401K factor into this equation? Here’s what you need to know.
401K as Marital Property
If you started your 401K prior to marriage, you might naturally assume that it will be viewed as a personal asset, rather than a marital asset. However, your income is a marital asset, and the money that goes into your 401K falls under this category.
The amount you put in prior to marriage is not marital property, but anything you added since marriage is, along with interest earned on that money. If this is the case, the court will calculate the amount of your 401K that is considered marital property, and you will be responsible for delivering half (or a fair and equitable amount, as determined by the court) to your spouse following the completion of the divorce process.
The only time you wouldn’t be required to split a 401K with your spouse (or more specifically, the portion considered to be a marital asset) is if your spouse has a 401K of roughly equal value, and you both agree to retain your own 401K and essentially call it even. Typically, however, one spouse’s 401K is larger, in which case the difference in value is divided.
There are a few ways in which a divorcing couple can choose to divide the portion of a 401K that is considered a marital asset. The first is through a one-time withdrawal that is exempt from early-withdrawal penalties.
It’s important to understand that this doesn’t necessarily mean tax-free. While you will avoid the 10% penalty typically applied to early withdrawal of retirement funds, the withdrawal could still incur taxes. Maintaining tax-free status is incumbent upon the receiving party conducting a direct rollover of funds into another 401K, IRA, or approved retirement account.
Many couples don’t want to deal with the difficulties of actually withdrawing and rolling over funds from a 401K. In this case, the spouse that owes money from a 401K can simply offset the amount owed by ceding an equal portion of other assets they’re meant to receive in the course of the divorce. In other words, the 401K holder will offer something of equal value in exchange for owed 401K funds, such as cash or property.
Another way to divide a 401K is through deferred division, by which the 401K will not be divided until the age of retirement is reached. If this is the agreement, the receiving spouse must provide a Qualified Domestic Relations Order to the plan administrator spelling out the payment amount and structure.
If you’re going through a divorce and you’re concerned about a 401K and how best to divide it, it’s wise to seek qualified legal guidance. Contact the attorneys at The Gucciardo Law Firm for assistance today at 248-723-5190 or online.
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