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401k division during divorce

Those who are the primary income earners in their homes likely go into divorce proceedings in Indianapolis understanding that they are going to have to relinquish full ownership of their marital assets. Few initially understand, however, that a 401k retirement account sponsored through their employers is included in such assets. As such accounts are funded from their income, the contributions made to them when people are married are considered marital property. Yet given the tax implications inherit with retirement accounts, one might wonder a 401k is divided up between parties during a divorce. 

The 401k Help Center offers up the suggestion of not included it as a marital asset at all. One might do this by negotiating with their spouse to set aside their claim for a portion of another valued marital asset in exchange for that spouse relinquishing their claim to their portion of a 401k’s contributions. Doing so would allow one to retain full ownership of their account. 

If one’s spouse is not open to that idea, there are other methods of dividing the 401k. Each begin, however, with the court issuing a Qualified Domestic Relations Order. This document authorizes a 401k plan provider to make payments to someone other than the plan participant. According to information shared by Yahoo Finance, once a QDRO has been issued, two commons ways of dividing up 401k contributions exist: the first is to roll the non-contributing spouse’s portion over into an IRA. The second would be for the non-contributing spouse to defer their payments until the plan participant reaches the age of retirement. 

A non-contributing spouse could also cash out their portion of a 401k’s funds immediately. However, the plan participant should ensure that their divorce decree requires that the non-contributing spouse pay the tax penalties that come as a result.