Your 401k and Divorce: 10 Facts

One item that people frequently worry about most when they find out they are getting divorced is their 401k. The prospect of sharing their retirement savings, whether in a 401k, IRA, pension, or other retirement accounts can cause a lot of anxiety. I have always found that the best way to alleviate anxiety in divorce is with accurate information. So, here are some basics of what you can expect regarding your 401k if you are getting divorced.

  • At least in North Carolina, only the marital portion of the retirement account can be divvied up by a court. Typically, that is the portion of the account that accrued between the date of marriage and date of separation. 
  • Many, if not most retirement accounts can only be divided by way of a special court order called a “Domestic Relations Order”. 
  • Dividing retirement accounts without a court order or a properly drafted and executed separation agreement can result in expensive penalties and taxation on the withdrawals to the account owner. 
  • Most 401k companies will not allow you to give your spouse specific parts, shares, or assets of a 401k. For example, it is usually impossible to give your spouse just the Apple stock out of your 401k.
  •  There are big differences between Roth and non-Roth retirement accounts in taxation when the funds are withdrawn later.
  • Some retirement accounts can be divided such that your spouse gets their own separate account. But, some can only be divided such that your spouse gets a portion of your payment once you start receiving benefits.
  • Annuities are difficult to divide and therefore payments from the annuities may need to be shared or divided when the payments begin.
  • When dividing pensions, there are important and tricky survivor benefits that need to be considered and addressed.
  • Some retirement plans have online services for researching and drafting domestic relations orders to divide the accounts.  
  • The “coverture fraction” or “marital coverture fraction” is the most common technique for determining what part of a “defined benefit” (e.g. pension) plan can be divided. This is the fraction representing the years of the marriage during which you earned the benefit, divided by the total years you earned the benefit. If you earned the entire benefit while you were married, then the fraction is 1/1. If you were not married for the entire time you earned the benefit, then the fraction will be less than 1. 

Dealing with retirement accounts in divorce can be complicated and the details of each plan and case are important. But understanding some of the basics can help reduce anxiety in the early stages.  Optimizing retirement outcomes for both parties in divorce is best done in a joint problem solving divorce process where all of the options can be discussed.   

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