Drill Down: Divorce
The important lesson here is simple: your 401k may be a joint asset. Don’t think of it as “mine,” think of it as “ours.” Divorce law varies from state to state, so you’ll need to check with a good attorney in your jurisdiction. You may be able to keep the amount you had before the marriage, but you will likely have to split the 401k assets that accumulated during the marriage.
Your particular 401k plan may limit your choices for distributing the spouse’s portion. As in death, the plan administrator may not want the bother of keeping two accounts open. Check the details of your particular plan before you start negotiating.
The mechanics of splitting a 401k are pretty flexible. You might keep sole title to your 401k while your spouse keeps other assets, such as the house. Or you might split the 401k down the middle. You and your spouse can negotiate pretty much anything you want. The result will be a “Qualified Domestic Relations Order,” the legal document that allows your spouse to have a portion of your 401k. (Your attorney may pronounce it “quadro.”) If there is a loan from the 401k outstanding, be sure that repayment of the loan is specifically addressed.
There is no penalty tax when a 401k is split up (whether split 50-50 or in other proportions) so long as the Qualified Domestic Relations Order is properly prepared and the spouse transfers the money into a new 401k account or rolls it directly into an IRA. Be careful not to take a check from the plan and deposit it to your own bank account. It’s safest to have the money transferred directly into a new 401k account or an IRA (which can be a new IRA or an existing IRA).
After the divorce—by which I mean within 5 minutes after the divorce is finalized—change the beneficiary of your 401k. Have the paperwork prepared ahead of time and ready to sign.
Bill Says: This is NOT the time to be stingy with lawyer’s fees. Get advice from someone who handles this sort of thing every day.
The key steps for managing your 401k in a divorce are:
- Disclose information about your plan to your attorney, including your account balance and the plan’s rules for distributions in case of divorce.
- Make sure the Qualified Domestic Relations Order is followed by the 401k plan administrator. Don’t let anybody drop the ball.
- Change your beneficiary after the divorce is final.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 8: Death and Divorce
Lesson 9: Your 401k, Your Other Assets, and Your Life
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