If you’re like many people who participate in a 401(k) plan at work, it may represent one of your most significant assets. Should you and your spouse decide to divorce someday, your 401(k)—and theirs, if they also have one—will figure prominently in whatever financial agreement the two of you work out or that a court imposes on you. Here is what you need to know about 401(k)s and divorce.

Key Takeways

  • If you and your spouse divorce, your 401(k) could be divided up as part of the financial settlement.
  • The same is true for your spouse’s 401(k) if they have one.
  • How the 401(k) is to be divided will be detailed in a qualified domestic relations order (QDRO).
  • In some cases, money you contributed to your 401(k) plan before you married will be off-limits.

What Happens to 401(k)s in a Divorce?

Like individual retirement accounts (IRAs), 401(k) plan accounts are owned individually and not jointly. While your spouse may be named as the beneficiary on your 401(k), you alone own it. Same for your spouse’s 401(k). 

If spouses divorce, their 401(k)s and other individual holdings—as well as any jointly held assets, such as a home or bank account—may be divided up as part of the financial settlement.

Assets held in a 401(k) or other qualified retirement plan are typically divided through a qualified domestic relations order (QDRO), which the Internal Revenue Service defines as “a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.”

In a divorce, the state where you live will come into play, especially if you leave it to a judge to decide how to split up your assets. In a community property state, the court will split your marital assets 50/50. In the case of a 401(k), the money you contributed to your account before you were married isn’t considered a marital asset. In an equitable distribution state, the court will divide up your assets in what it views as an equitable manner, which may or may not be 50/50.

Depending on what else you and your spouse own, it can sometimes be easier to leave your retirement plans alone and divide up other assets instead.

How a Qualified Domestic Relations Order (QDRO) Works

When 401(k) assets change hands in a divorce, the spouse who is entitled to receive a portion of the other spouse’s account is referred to as an alternate payee. Alternate payees may have several choices for how they receive their money, depending on how the QDRO is written.  

For example, the QDRO may provide for either a “shared payments” or “separate interest” arrangement.

With shared payments, the spouse and ex-spouse will split, proportionately, each benefit payment that the plan participant receives.

With a separate interest arrangement, the 401(k) account will be split into two parts, again proportionately, and the alternate payee’s share may be put into a separate QDRO account by the plan’s administrator.

In a separate interest arrangement, the alternate payee can choose to receive benefits on their own timetable. They may also have the option to take their share as a lump sum and roll it over into their own 401(k) plan or an IRA in their name.

After a divorce, don’t forget to review your 401(k) beneficiary designations and change them if necessary.

How 401(k)s Are Taxed in a Divorce

If the alternate payee chooses to roll over their share of the account into their own 401(k) or IRA, that transaction can be tax-free, as with any other retirement plan rollover. They won’t have to start paying taxes on any of the money until they start taking distributions from it.

But if, instead of rolling over the money into another retirement account, they decide to take some or all of it in cash, they will have to pay income tax on that amount. However, they will be exempt from the usual 10% tax on early distributions for anyone under age 59½.

Once the alternate payee begins taking distributions from their ex-spouse’s account, a separate QDRO account, or their own retirement account, those amounts will be subject to income taxes, just as they would if it had been their 401(k) all along.

What Happens to a Traditional Pension in a Divorce?

A traditional, defined-benefit pension is subject to similar rules as 401(k)s and other defined-contribution plans. However, the calculations for dividing up the account can be more complicated and may require the services of a pension actuary or other expert.

How Are IRAs Divided in a Divorce?

Individual Retirement Accounts are not included in qualified domestic relations orders (QDROs) because they are not employer-based plans. Instead, they are divided up as part of the divorce decree or other written instrument. One spouse can transfer all or part of their IRA to the other spouse’s IRA without either incurring taxes. This is often referred to as a “transfer of account incident to divorce.”

Can a Divorced Spouse Collect on Their Ex-Spouse’s Social Security Benefits?

In some cases, yes, a divorced spouse can collect Social Security benefits based on their ex’s earnings record. To qualify, the applicant must currently be unmarried and at least age 62, and the marriage must have lasted 10 years or more. The amount the divorced spouse receives will not have any effect on the other spouse’s benefit.

The Bottom Line

If you divorce, you could lose all of part of your 401(k) account—or gain all or part of your ex-spouse’s account. The terms of that arrangement will typically be spelled out in a qualified domestic relations order, or QDRO.

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