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3 ways to protect a 401(k) during a divorce

On Behalf of | Jun 4, 2024 | Division of Property

Some people have to start 401(k)s as part of a comprehensive benefit package when they begin a new job. Others slowly fund a private 401(k) that they start on their own behalf as self-employed professionals.

Regardless of which approach a professional employs, they likely worry about protecting their retirement savings when a divorce is imminent. Equitable distribution rules often force people to divide their retirement accounts during the divorce process. People can lose a substantial amount of the balance that they expected to help improve their standard of living during their golden years.

How can those preparing for divorce protect the savings they have set aside for retirement in a 401(k)?

By splitting the account carefully

Sometimes, the only solution for retirement accounts during a divorce is to divide the account between the spouses. Doing so not only reduces the overall balance of the account but could also lead to penalties and tax consequences. Those who use a qualified domestic relations order (QDRO) drafted by an attorney can divide their retirement savings without worrying about taxes and a 10% penalty.

By proving some funds are separate

Typically, family law judges divide marital property between spouses but do not touch the separate property of either spouse. If someone set aside funds in a 401(k) prior to marriage and did not contribute to the account during the marriage, they may be able to protect what they have saved as their separate property. If they continued depositing in the same account throughout the marriage, they could theoretically preserve at least a portion of the balance that they deposited before getting married as their separate property.

By offsetting savings with other assets

If retirement savings are theoretically marital property, someone does not automatically need to divide their 401(k) to achieve a fair property division outcome. Spouses who negotiate their own settlements can use other assets or even marital debts to balance out one spouse’s retention of a 401(k). Judges also theoretically have the discretion to allow someone to keep a 401(k) so long as they account for its value when allocating other assets in the divorce.

Individuals who are preparing for complex divorces with a substantial marital estate may need assistance deciding how to divide their property and protecting specific resources. Identifying the assets that have the most significance and focusing on specific goals during divorce can help someone achieve the best outcome possible in what is likely to be a challenging personal situation.