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In a Divorce, Who Gets the 401k?

A divorce settlement can be excruciating. It is not always patient; it is not always kind. It can be rude. Self-seeking. Easily angered. And if you've developed a comfortable nest of 401k funds, you may find these benefits at the center of your divorce settlement maelstrom.


"I've seen 401k participants who've been abandoned by their spouses. Participants who've been left with kids to support and a household to run," says Ted Benna. "I've also seen participants with huge account balances doing irrational things - like forbidding plan administrators to work with their spouse's divorce lawyers - all in an attempt to keep their spouses from getting any of the retirement benefits."

Your desire to protect your funds may be self-seeking. Or it may be a matter of survival. But either way, your spouse has the legal grounds to claim all or part of your 401k benefits in a divorce settlement. And in most cases, you'll have to find a way to make a fair and equitable split of the funds. By being organized, prepared and knowledgeable about your legal options and rights, you can split your 401k reasonably.

Know Your Plan, Know Your Options

When deciding how to divvy up your 401k account with your soon-to-be ex, start by discussing options with your plan administrator. "A lot of what you can do with your 401k is directed by the plan," says Laura Johnson, a family law paralegal and author of Divorce Strategy: Tactics for a Civil Financial Divorce.

Each plan has its own set of benefit provisions and administrative rules. While some plans divide earnings by percentage, others divide by shares. And while some permit a distribution of the ex-spouse's portion at the time of the divorce, others require recipients to wait until retirement. "Before you talk to your lawyers and financial planners and accountants - and well before your divorce decree is drafted - you need to do your own research into your plan's guidelines," says Johnson. "And don't expect anyone else to do it for you," she warns. "Because in many cases, they won't."

The Equitable Split: Four Common Options

Once you've researched your plan administrator's rules and stipulations, you'll likely have one or more of the following options for dealing with your 401k in the divorce decree.

Option 1: You keep all of your 401k, and your spouse takes other marital assets of comparable value.

This option is sometimes cited as the least complicated from the attorney's point of view, but it requires careful research and financial calculations. If you choose this route, you'll need to consider at least two economic factors to ensure that you and your spouse remain on equal financial footing: 1) your long-term tax consequences and 2) the current and long-term values of the assets being divided.

You'll need to subtract the imputed tax - the tax you'll eventually have to pay on the amount in your account - from the value your 401k will hold at the time of your retirement.

On the other side, your soon-to-be ex will want to weigh the long-term value of the 401k against the long-term value of the assets he or she is receiving. For instance, if your 401k is worth $100,000 at the time of the divorce, and you have a fairly long time horizon until retirement [during which your account will earn compound (tax-deferred) interest], your 401k may be worth much more than $100,000 at the time of your retirement. Your ex will want to ensure that his or her share of the marital assets will be equally valuable over the long haul.

Option 2: You and your ex-spouse split the 401k assets.

If you want to split your 401k account with your ex rather than hashing out a division of marital assets equal in value to the 401k, then you will need a Qualified Domestic Relations Order. A QDRO (pronounced "quadro") is a court order that creates the right for an alternate payee (in this case, your ex-spouse) to receive all or part of your plan account. The QDRO must be a judgment, decree or order that is made pursuant to a state domestic relations law and relates to the provision of child support, alimony payments or marital property rights.

According to Benna, the least complicated procedure is often for the QDRO to stipulate that your 401k plan will be split into two accounts. This would enable you to continue to manage and contribute to your account as before, while your ex-spouse could make investment choices for his or her account, but not contribute to it. When you retire and become eligible to receive distribution of your funds, most 401k plans are set up so that your ex-spouse will also be eligible for distributions.

If you choose to divide your 401k, you may have to iron out issues such as repaying an outstanding loan, and how to allocate any earnings or losses that occur between the date of the divorce and the date the QDRO is made effective by the plan administrator.

"The drafting of a QDRO is a sensitive spot," says Johnson. "Because many divorce lawyers don't investigate a particular pension plan's guidelines before giving advice to clients on separation agreements, they often submit inadequate QDROs to plan administrators." And if the QDRO contains vague language or doesn't conform to plan guidelines, your plan administrators will reject it. It will then have to be re-drafted by your lawyer or your ex-spouse's lawyer. This, of course, results in additional fees. And more emotional hardship.

"Because of problems with QDROs, I've seen lag times of several months - or even years - before QDROs were accepted by plan administrators and the 401k plans were actually divided," says Johnson. "It takes an emotional toll. People feel like their divorce will never go away."

The moral? Understand your plan administrator's guidelines for splitting the 401k before your attorneys begin drafting the QDRO. Share this information with your attorneys. And begin the drafting process early in your discussions, so you'll have time to get it accepted by the plan administrator as part of the divorce settlement.

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This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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