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How to Protect Your 401(k) From Your Spouse During a Divorce

Michael Tierney
August 6, 2022

Divorce signifies the end of your marriage to the person you love; it's a challenging process that will test your patience and your character. Unfortunately, divorce is a common conclusion for marriages across the country and generally leads to some legal disputes. While a divorce is not guaranteed to affect your marriage, it is statistically likely to come up at least once. While reconciliation is sometimes an option in certain relationships, you are likely reading this article because such a conclusion is not viable for your situation.

We realize this situation is highly unpleasant for you and that you are likely grappling with the intense emotions that divorce proceedings are known to elicit. Unfortunately, this likely means one of the last things that occurred to you was how the divorce could impact your finances.

One of the inescapable parts of divorce is the division of assets you and your spouse must discuss. The division of assets is usually negotiated during a divorce to ensure an equitable distribution. These negotiations consider several details to determine who deserves what portion of the finances you shared with your spouse.

Unfortunately, among the finances that are considered for distribution are your 401(k) and other retirement accounts.

While the funds in your 401(k) are intended to be saved for your retirement, divorce does open your portfolio to asset negotiations to ensure no spouse walks away with an inherent financial advantage over the other. Given the significance of your 401(k), it is essential to understand how you can protect it during the divorce proceedings and how those funds will be discovered by your partner's attorney.

A Quick Background on 401(k) Plans

Our society requires us to work hard to earn a living to support ourselves financially. However, no one can work their entire lives, and we all eventually retire. Unfortunately, retirement does not come with a guaranteed paycheck, and it falls to every American citizen to plan for retirement from the moment their employment begins. That said, The United States created a federally backed program to help workers finance their retirement effectively. This is where the 401(k) concept was first conceived.

Government officials implemented the 401(k) system in 1978 after the United States Congress completed a study around the concept that would eventually become a 401(k). Sometime before 1974, employers were offering their staff cash to finance their retirement funds. After completing the Congress' study, Internal Revenue Code Section 401(k) was added to the Revenue Act on November 6th, 1978. After which, Ted Benna, commonly referred to as "the father of the 401(k)," established the use of the 401(k) at Johnson Kendall & Johnson, an insurance firm where he was employed.

401K Plan For Retirement

Around Benna's heyday, employees could divert 25% of their salaries to their 401(k). This allowed the average employee to add up to $30,000.00 a year to their 401(k). Since then, the 401(k) has evolved to match modern business practices, with some employers matching 401(k) deposits as a benefit for their employees. Currently, there are two major 401(k) types:

  1. Traditional: The standard 401(k) gained traction in 1978.
  2. Roth: The Roth 401(k) is a modified format established in 2006 that treated the 401(k) similarly to a Roth IRA, another financial account type.

Your 401(k) exists to provide financial stability in your retirement, but that does not render it invulnerable to divorce negotiations. Divorce requires the division of assets, and a 401(k) is an asset, which brings us to the question of how you can protect it from divorce negotiations, so your spouse does not abscond with your retirement.

Option 1: Offer Alternatives

While you might not want to consider it, compromise is one of the few ways to get what you want.

Solution Asset division usually involves a fair amount of compromise to ensure certain assets you truly do not want to surrender are not lost to you, which unfortunately means you will need to concede certain assets to your spouse in exchange.

For example, perhaps your spouse wants to hold on to an expensive piece of furniture they are particularly fond of, but you have a stronger claim to it. You might be able to prevent your spouse from claiming a portion of your 401(k) by surrendering that piece of furniture to them. The same concept works in reverse, with your spouse surrendering certain assets to get something from you. These discussions are common in amicable divorces.

Splitting Assets During Divorce

While such compromise does play a prominent role in protecting your 401(k), it is not perfect. The key is to accept that you cannot protect all of your assets and will have to surrender a fair portion, especially if you are more financially stable than your spouse. Divorce agreements almost always factor in the financial standing of both parties and ensure that the more stable member of the pair provides more to their spouse.

It is possible to fulfill this requirement with a liquid currency like that found in a 401(k). By offering assets your spouse wants that are equivalent to the amount you would have had to pay from your 401(k), it is possible to preserve your retirement fund. However, sometimes offering alternative assets to preserve your 401(k) is insufficient, and you will need to divide the funds anyway. If you do end up having to divide the funds of your 401(k), there is a tool you can use to ensure the division is equitable.

Option 2: Qualified Domestic Relations Order

It is not always possible to protect your 401(k) in its entirety, and you will often end up having to share with your spouse. Often, assets are divided down the middle for a 50/50 split unless your spouse is in dire straits and requires more to enjoy the same quality of life. Still, if your 401(k) becomes a part of those negotiations and you concede to sharing the funds saved in the account, it is possible to negotiate a more beneficial arrangement. Doing so will likely require a qualified domestic relations order (QDRO).

It's entirely possible that you have never heard of a QDRO, especially if you have never been divorced:

Solution A QDRO is a judicial order exclusive to the United States of America used to divide property during legal separation or divorce. Specifically, a QDRO is designed to help split the funds of a retirement account and reorganize joint ownership plans on the funds. The QDRO legally grants your spouse a portion of the plan, including a 401(k), and creates two new accounts that you and your future ex have independent control over.

While a QDRO does not protect your 401(k) from being divided between you and your spouse, it gives you more control. Your spouse will not be able to exercise direct control over your 401(k) as they will have their sub-account to manage instead. You can also contribute to your account as you see fit without worrying about retroactive payments being sent to your spouse once the divorce is finalized.

Qualified Domestic Relations Order

Every QDRO requires the following information to be valid:

  • The full, formal name of the type of plan. In this case, the 401(k) plan.
  • The full name, last known mailing address, and employer of you and your spouse.
  • The social security numbers for you and your spouse.
  • Your 401(k) 's plan identification number (only if it differs from your social security number).
  • The amount owed to your spouse and how you calculated that sum.

If any of these details are absent from the QDRO paperwork, it will be invalid. While a QDRO is not a perfect solution, you will find that there is seldom a perfect solution for asset division. Still, a QDRO can be a beneficial compromise to avoid having most of your 401(k) taken in the divorce. Remember, QDROs and trade agreements require you and your spouse to be able to reach common ground. Sometimes, that is not an option, and an impartial 3rd party is necessary to dictate how the funds are divided. Fortunately, half the point of divorce court is to mediate such issues.

Option 3: Defer to the Courts

Divorce proceedings can quickly devolve into a major argument between you and your future ex-spouse. Divorce is an emotionally turbulent situation to find yourself in and can make it difficult to find common ground.

When this happens, negotiations on assets like your 401(k) can quickly become gridlocked as you cannot effectively compromise.

Solution One or both of you may have requirements you refuse to compromise on, and your attorneys can only take the talks so far.  Unfortunately, sometimes the best way to protect your assets is to leave the decisions up to the court officials.

A judge does not always have to make executive decisions on divorce proceedings, and the times they do are due to the inability of the couple to agree. When your 401(k) is being negotiated, and you cannot reach common ground or see reason in each other's arguments, the question of how the funds in the retirement plan are distributed can be posed to the judge. At this point, the judge will assess the financial needs of both you and your spouse to determine who needs more funds.

At this point, the same factors used in determining alimony are considered for you and your spouse. The point of asset division is to help maintain the quality of life you and your spouse enjoyed during the marriage. As a result, your spouse's income will be compared to yours to determine how much help your spouse will need to maintain that quality of life without taking it away from you. Regarding retirement accounts like a 401(k), the court will decide what percentage of the account can reasonably be divided.

Court Making Division Decision

Additionally, the courts' formula varies depending on whether you live in a community property state. A community property state is where all assets acquired during the marriage are considered community property. This means the assets are split 50/50 without exception, possibly including your 401(k) funds. Though, there are only ten states that are considered community property states. These are:

  • Arizona
  • Nevada
  • New Mexico
  • California
  • Texas
  • Idaho
  • Washington
  • Louisiana
  • Wisconsin
  • Alaska (Only if both spouses sign a community property agreement.)

The property is equitably distributed if you do not live in a community property state. This means the judge will split the assets in a way they deem fair, even if it is not an equal division. Community property states also allow you to negotiate with your spouse and declare a new beneficiary for your 401(k) so long as you have their consent. Additionally, your spouse will have no claim on funds put in the account before you were married or any inherited money.

Unfortunately, this is the extent of the protections you can acquire for your 401(k). Divorce proceedings seldom allow you to fully protect any asset from division, but these techniques should equip you to protect your 401(k) as best as possible.

Learn the Law

A 401(k) is easily one of the most important financial plans the average American has. It secures a windfall for life when you no longer have a consistent source of income, making it a necessity to survive retirement. Unfortunately, the vital nature of the 401(k) you have been building does not render it immune to the negotiation phase of divorce proceedings. You will likely need to protect your investment in the account.

While this might be a frustrating surprise to some, it is a perfectly salvageable situation. You will have opportunities to negotiate for preserving your 401(k), though you will likely have to make concessions elsewhere in the divorce.

Learning Divorce Law

Aside from this information, other details important to divorce proceedings could affect how the case resolves. Divorce is extremely unpleasant, and some details are more complicated than others. The more you learn about how divorce works, the better equipped you will be to protect your assets and recover from the emotional turmoil.

In the past, information on divorce was difficult to acquire without direct access to a legal library or training in law. Nowadays, information is easily accessible and allows you to brace yourself for the turmoil that divorce can bring. We know that dealing with divorce is never easy, and it rarely happens at an opportune time, but overcoming it is possible, even more so when you arm yourself with the necessary knowledge. If you are currently going through the divorce process, we truly wish you the best.

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Written By:
Michael Tierney

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