Professionals fund 401(k)s for several reasons. Obviously, concerns about financial stability during retirement are a motive to fund a 401(k). Employer-matching benefits can also make funding a 401(k) a financially savvy decision.
People can increase their retirement resources by maximizing their contributions and receiving contributions from their employer. Additionally, the funds that they transfer to the 401(k) reduce their taxable income for the year.
However, the tax-deferred status of a 401(k) makes the account inaccessible. If people withdraw funds from a 401(k) before reaching retirement age, they are at risk of incurring a 10% penalty and substantially increasing their taxable income for the year. What happens to a 401(k) during divorce?
Spouses may need to split the account
A 401(k) is typically in the name of an employee. However, that does not mean it is their separate property. The contributions made during the marriage are potentially subject to division.
Spouses can potentially determine the portion of the account that they accrued during the marriage. They can use responsibility for marital debt and the division of other property to offset the value of the 401(k). It is also possible to divide a 401(k) during a divorce without incurring a penalty.
If there is a final property division decree requiring a direct division of the account, spouses can have an attorney draft a qualified domestic relations order (QDRO). It is possible to retain a 401(k) during divorce by compromising in other aspects of property divisions. Spouses can also split the account without losing additional funds to taxes and fees.
Properly addressing valuable resources that can affect life after divorce is important for those preparing for property division negotiations. Spouses who understand property division rules can achieve reasonable settlements that help them rebuild quickly after a divorce.
