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Should you split your 401(k) down the middle in the divorce?

On Behalf of | Jul 7, 2022 | High Net-Worth Divorce

Perhaps both you and your spouse have 401(k) retirement accounts. These may be among the most important assets in your upcoming divorce.

You likely assume there will be a 50-50 division of the accounts, but there may be other options for the two of you to consider.

The financial picture

Dividing a 401(k), while a most important activity, is only one part of the larger financial picture in the property division stage of your divorce proceeding. The goal of the court is to divide your assets equitably, but that does not necessarily mean a split down the middle. The judge will look at various factors, including the length of the marriage and the financial status and earning ability of each of you. You will need a Qualified Domestic Relations Order (QDRO), a legal document telling your plan administrator how to divide the funds in the 401(k). Also, there will be a fee associated with the preparation of the QDRO.

Other options

Think about what you want to accomplish financially. For example, if you and your spouse have IRAs or brokerage accounts in addition to your checking and savings accounts, you might be able to simplify 401(k) division. Offsetting balances may be available by using these other resources.

Early 401(k) withdrawal

Dividing a 401(k) is a complex undertaking. However, if you need cash—to purchase your spouse’s interest in the family business, for example—you can use the proceeds from a 401(k). You will not have to contend with an early withdrawal penalty tax as long as you are taking the funds out in accordance with your divorce decree and a QDRO is in place for the withdrawal.

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