Will My 401(k) Plan Be at Risk in a Divorce?

Your retirement plan, or 401(k), is one of the most valuable assets you may own. However, if you decide to seek a divorce from your spouse, you may have to divide your 401(k) equally during your division of assets. Depending on when you acquired your retirement plan, your spouse may receive up to half of the value you acquired during your marriage.

California Rules for Dividing 401(k) Plans

Your retirement plan will be one of the most significant assets on the table during your divorce. California operates on a community property basis, which means that you must divide your retirement plan and all other assets you acquired during the marriage in half between you and your spouse. As a result, your spouse will receive 50% of your retirement plan’s value that you acquired over the course of your marriage.

All types of retirement plans are subject to these regulations, including employment-based plans, family-owned business plans, and traditional private employment plans. However, your spouse can only claim the amount you accrued while you were married. For example, if you worked 100 months under your 401(k) and you were married for 50 out of those 100 months, your spouse could claim 50% of the retirement value you accrued while married.

Options for Dividing Your Retirement Plan

You can divide your retirement plan one of two ways when you are negotiating your divorce. First, you and your spouse can agree that your spouse will receive his or her pay-out of your retirement plan when you retire. If you do not agree to this settlement, you and your spouse can agree to assign the entire value of the retirement plan to you solely, and your spouse will receive his or her share of your plan in other community property.

A court can also order you to pursue one of these two options if you cannot come to an agreement. Deciding which option to pursue will depend on your circumstances. Each option has different impacts such as tax consequences, risking losing the future value of your retirement plan, and other financial risks. Speaking to a California divorce attorney can help you determine which option would work best for you.

If you do split your retirement assets, you will need to file a Qualified Domestic Relations Order to help you transfer your 401(k) value into your spouse’s retirement plan. This option provides a tax- and penalty-free way to split your retirement plan under California law. You can roll your 401(k) funds into a traditional or Roth IRA, but you should speak to a divorce attorney or accountant to determine if that is the best option for you.

Can You Withdraw From Your 401(k) Before Divorce?

The fear of losing your retirement plan might tempt you to withdraw your 401(k) funds when you suspect that you and your spouse will divorce in the near future. While you may believe this action would protect your retirement funds, this action will have consequences during your divorce. When you withdraw your 401(k) funds, the court will view this action as if you took an advance on your share of your marital property that is subject to division.

As a result, the court will require you to reimburse your spouse for the funds you withdrew from your 401(k) plan. You can lose out on other pieces of community property by taking this action. In addition, the court may require you to pay a pre-tax, pre-penalty valuation of the funds, depending on your reason for withdrawal.

Dividing your retirement plan may be a difficult challenge to tackle during your divorce negotiations. If you need assistance advocating for your needs at the negotiation table, contact a California divorce attorney to represent you at these discussions.