What happens to a 401(k) after the divorce?

One of the most contentious issues couples must face when divorcing is splitting the money. This is not just about checking and savings accounts, but it encompasses other assets such as property and retirement accounts.

Retirement accounts are some of the trickiest assets to deal with during the divorce.

Money division cannot happen immediately

retirement account requires special handling. Because it is not an open-access account, the division does not occur upon the divorce. When deciding who gets how much of a 401(k), some of the most common questions include the following:

  • Was the account started before or after marriage?
  • What was the contribution history?
  • What is the value at the time of separation?

Handling division

A 401(k) is one of the highest-leveraged pieces of property during divorce. One party may feel more entitled to the account and fight hard to keep it. Due to the tie-up until retirement, there are a few options for resolving the issue:

  • One-time buyout – If one spouse holds the 401(k) exclusively, the other may have the chance to cash out sooner. Bartering for an exchange of other assets or property is one way to effect equitable distribution. The non-account holder may opt to get a lump-sum payout for a reduced amount rather than wait for many years down the line.
  • Increase alimony – Another option couples may consider is increasing alimony payments or offering them instead of a 401(k) split. This is a long-term buyout allowing the account holder to make payments to the other party.
  • Wait for retirement – The parties may agree to wait until they are eligible to draw from the 401(k). The non-account holder’s share zes based on the account balance at the time of the divorce. The account holder continues to make contributions, but those do not benefit the former spouse.

Money is one of the main reasons couples wind up terminating their marriage in the first place, so it stands to reason that dealing with it during the divorce is difficult. Understanding more about the 401(k) division process may help set expectations.

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