During your divorce proceedings, the division of assets goes beyond household income and bank account holdings. To fairly divide the funds accumulated throughout your marriage, the funds placed in 401(k) accounts will come up as well. Every state has its own specific protocol, but you can confidently head into this process by thoroughly understanding the way courts strive to fairly divide these retirement account holdings for each spouse.
1. Determine Marital vs. Separate Property
The first task in the division of 401(k) accounts is identifying the amount of funds placed in the accounts during the marital period. Funds placed in these accounts prior to the marriage are usually not considered assets eligible for distribution to both parties in the divorce. In general, assets owned by either spouse before the marriage, including 401(k) funds, are considered separate property. However, if you have any 401(k) accounts with contributions made after you were married, you will likely be dividing those funds as part of the marital pie.
2. Calculate the Division of Shared Assets
The state you live in will determine the way your overall assets are divided during the divorce proceedings. In community-property states, the 401(k) funds that qualified as marital assets will likely be split 50/50 between both parties. However, in equitable-distribution states, the judge may split the assets differently because they are looking at the entire picture (although the main goal remains the equal division of assets).
Now is the time to identify all other shared assets that qualify for division between you and your spouse. You do have some leeway in negotiating the way the assets will be divided, if your spouse agrees with the plan. (For related reading, see: Divorcing? The Right Way to Split Retirement Plans.)
3. A Qualified Domestic Relations Order Finalizes the Split
In addition to obtaining a properly completed divorce decree, your lawyer—or an expert retained by your lawyer—must fill out and submit a qualified domestic relations order regarding your retirement account. This document indicates that the account must be split according to the divorce order.
Upon approval by the judge and account administrators, your name will be added on the 401(k) as an additional payee. Since this document finalizes the agreements made prior to it, it must be filed with the court to confirm and enact the distribution plan.
With the above steps, you should be able to claim the retirement assets during the divorce that are owed to you. Taking the time to appropriately navigate through the distribution of 401(k) plans that were established during your marriage will help protect your financial future. To avoid serious financial repercussions at the finalization of your divorce, you can work with a trusted advisor. Then you will be sure you have completed each vital step.
(For more from this author, see: 5 Financial Steps You Need to Take Before Divorce.)