What Happens to a 401K After a Divorce?
When considering property division as part of a divorce, many couples focus on the big and obvious items. These may include the marital home, any vehicles the couple owned, and perhaps even a business. However, what happens to a 401K during a divorce? Many people already have these in place when they enter into a marriage and do not consider them when thinking about property division. It often comes as a surprise, then, to learn that their 401Ks can be divided.
A 401K is Marital Property
Any money contained within a 401K prior to marriage is considered personal property and as such, is not subject to the rules of property division in a divorce. Income earned during a divorce though is considered marital property and therefore, is divided upon divorce. As such, any income contributed to a 401K after the marriage is official is subject to property division.
Some couples enter into a marriage with each spouse already having a 401K. Many times, these accounts are of similar sizes. When this is the case, many people decide to simply keep their respective 401Ks and do not divide either of them.
Penalties and Taxes When Withdrawing Money From a 401K
401Ks are intended to provide individuals with money after they retire from the workforce. When the money is withdrawn earlier than this, there is a 10% penalty applied. However, when 401Ks are withdrawn as part of a divorce, this penalty is waived.
Still, dividing a 401K can still come with some financial issues. For example, any money withdrawn from a 401K is considered taxable income and so, spouses may have to pay applicable taxes unless they roll the funds over into an IRA, another 401K, or another type of retirement fund.
Offsetting a 401K
Many times, a couple does not want to withdraw a 401K and then pay taxes or roll the funds into another account. This is even true when one spouse stands to gain quite a bit from the 401K. When this is the case, couples can agree to keep the 401K intact, but the spouse that has claim to a portion of it will receive more in other types of property. For example, if the couple did not want to withdraw from a 401K, but one spouse is entitled to 30% of it, that spouse may instead agree to take the family vehicle in lieu of dividing the retirement account.
In some cases, both spouses want to claim a portion of a 401K, but they still want to leave it in the account until they reach retirement age. In this instance, the individual receiving 401K funds from their ex-spouse’s account can file a Qualified Domestic Relations Order that outlines the payment amount and structure with the plan’s administrator.
Our Michigan Divorce Lawyers can Help with Your Property Division
If you are about to get a divorce, or the process has already started, and you are concerned about property division matters, call our Grand Rapids family lawyers. At Van Den Heuvel Law Office, we can advise on all property division matters, ensure you receive a fair settlement, and protect what is yours. Call us today or contact us online to learn more about how we can help with your case.