Experienced | Efficient | Compassionate

401(k) division during divorce proceedings

| Sep 16, 2020 | Firm News

Most people entering into divorce proceedings in Virginia tend to believe that they know what to expect from the process. Yet many still end up feeling surprised to learn that a 401(k) account is subject to property division.

401(k) account holders likely think that such assets are individual (as they typically exist due to their individual employment). Since contributions to an account come from marital income, however, family courts view them as marital assets.

Dividing up a 401(k) in a divorce

Once this information comes to light, most then want to know how the court divides up such contributions. The court will usually issue a Qualified Domestic Relations Order that authorizes a 401(k) plan sponsor to make a disbursement to an alternate payee (which, in the case of a divorce, would be the non-contributing spouse). The sponsor then typically divides the original 401(k) account into two, with both parties then assuming authority over their respective funds. Both sides might also seek to cash-out the portion of the contributions coming to them. Typically such action nets an early-withdrawal penalty (if the petitioner has not yet reached retirement age). Yet according to the website SmartAsset.com, divorce is one of the few cases where early withdrawals from a 401(k) can occur without a penalty.

Keeping the full 401(k)

A 401(k) account holder may worry that dividing up their account will dramatically impact their retirement plans. The 401(k) Help Center shows that one can attempt to keep their full 401(k) in a divorce, yet doing so requires that they convince their ex-spouse’s to forego their stake in it. This will likely require that they relinquish their interest in another marital asset of comparable value.