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

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Many people participate in a 401(k) plan through their workplace. A recent survey from the Pension Rights Center indicated that over 56% participated in a workplace retirement plan. In the context of a divorce, your 401(k) is considered marital property.

Any contributions made to the 401(k) are considered marital property, while any contributions prior to the marriage are considered separate property. 401(k) plans may be split during divorce. This split is impacted by state laws and pre- and postnuptial agreements. Let’s take a look at 401(k) in divorce and how this retirement plan is split between the two parties.  

Where Your Live Impacts How Your 401(k) is Split

How a 401(k) is split in a divorce depends on where you live.

Community Property State.  If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), the 401(k) is split 50-50. Each spouse is given an equal share even if one spouse contributed more than the other. 

Equitable Distribution State. All the other states that are not community property states will handle the 401(k) split based on fairness. The fairness factors include each spouse’s financial situation, length of the marriage, financial and non-financial contributions to the marriage, and the future earning potential of each spouse. 

The role of prenuptial or postnuptial agreements

A prenuptial or postnuptial agreement can override a state’s law regarding 401(k)s. Should a divorce occur, the treatment of the 401(k) is stipulated and could be considered separate property. The agreement may specify a different split percentage or may waive one spouse’s rights to the account.

How to Split a 401(k) in Divorce

Dividing a 401(k) requires a Qualified Domestic Relations Order (QDRO). This is a legal document that is filed with the court. It directs the 401(k) plan administrator to divide the retirement account in accordance with the divorce settlement. Here are the steps that need to occur:

• Step 1. An attorney drafts a QDRO. Both parties to divorce agree to the terms. 
• Step 2. The QDRO is filed with the court, and the judge approves the QDRO.
• Step 3. Once the judge approves the QDRO, it is reviewed by the plan administrator. 
• Step 4. If the plan administrator agrees the division is compliant, then funds are split accordingly. 

A QDRO is necessary to ensure the legal and compliant handling of retirement accounts. Without a QDRO, any withdrawals from a 401(k) could be penalized.

What Happens If You Empty Your 401(k) Before Divorce?

It is illegal to empty your 401(k) before your divorce. Your 401(k) is considered a marital asset that the court will want to equitably distribute between the parties. If you do withdraw funds from your 401(k) prior to your divorce, you may face penalties from the court. It could also lead to unfavorable court rulings. 

Withdrawing early from your 401(k) also has tax consequences. If you withdraw early from your 401(k), prior to age 59 ½ you will face a 10% penalty on the amount you withdrew and be subject to income tax on the withdrawal. 

How emptying your 401(k) before your divorce could lead to complications

Emptying your 401(k) prior to your divorce will cause several issues. You will end up losing money on retirement savings because of income taxes and penalties from the early withdrawal. The court may impose a separate penalty if your intention was to empty out your 401(k) prior to the divorce proceedings.

This action will also impact your credibility and result in the potential for an unfavorable divorce settlement. Emptying your 401(k) could also create more legal disputes.  

How Long Does It Take to Get Your Share of the 401(k) After Divorce?

The process to get your 401(k) does take some time because it requires drafting of the QDRO and court approval. The timelines are estimates since court approval time can vary from case to case. 

Timeline for QDRO approval by the court and plan administrator 

Drafting a QDRO is the first step for gaining approval. This process may take several weeks, depending on the complexities of the case. Once the QDRO is drafted by your attorney, they will submit it to both you and your ex-partner for approval. Once this first step is completed, the QDRO  will be submitted for court’s approval. 

• Court approval of QDRO. The QDRO is filed in court for the judge’s approval. Depending on the judge’s docket, it could take two to eight weeks to approve it. 
• Submission to the plan administrator. Once the judge approves the QDRO, it is submitted to the 401(k) plan administrator to determine if it is compliant with the rules. This could take two to six weeks. 
• Funding of the 401(k). The plan administrator will divide the 401(k) accordingly. This process could take 30 to 90 days. 

Common delays in processing and how to avoid them

If you want your QDRO to be approved quickly, there are preventive measures you can take to prevent delays in processing times. Here are a few common delays and how to prevent them:

1. Incomplete QDRO. The plan administrator rejects the QDRO because it is incomplete or is missing information. You can avoid this oversight by hiring an attorney or QDRO administrator to draft and check it before submission. 
2. Court processing delays. There is not much you can do to prevent court delays. Courts have a docket and may experience a backlog. You can try to file as soon as possible to prevent inordinately long process times. 
3. Slow administrator review. Sometimes, an administrator may slow down the process. It is a good idea to contact the administrator prior to the review to determine specific requirements. 
4. Dispute between the spouses. If one spouse suddenly disagrees with the QDRO, it will slow down the process because particulars need to be hashed out legally. Make certain both spouses agree to the terms before submitting the QDRO. 
5. Missing 401(k) plan details. Missing details about the 401(k) plan can impact process times. Make certain all details are included before submitting your QDRO. 

Tax Implications of Splitting a 401(k) in Divorce

Without a QDRO, withdrawal from a 401(k) can result in taxes and the possibility of penalties. Here are three different scenarios and potential tax implications: 

• Funds are transferred to an ex-spouse’s IRA or retirement account. No immediate tax consequences. Funds grow tax deferred until the ex-spouse withdraws. Ex-spouse will be responsible for taxes when withdrawals take place. 
• If an ex-spouse takes a lump sum distribution, the ex-spouse is responsible for paying income tax on this amount. The plan administrator will issue a 1099-R for reporting purposes. 
• The original 401(k) owner withdraws funds before the divorce is finalized. The original 401(k) owner will pay a 10% penalty on the withdrawn amount if under 59 ½ and, in addition, will pay ordinary income tax too. 

How the QDRO can prevent early withdrawal penalties

With a QDRO in place, withdrawal penalties can be avoided. For instance, if the recipient spouse decides to take a lump sum distribution for the 401(k) plan, then even if they are younger than 59 ½, they do not need to pay the 10% penalty. The amount will be added as taxable income. 

If the QDRO stipulates the ex-spouse will transfer the 401(k) funds into an IRA, taxation can be avoided until withdrawal. 

If a QDRO is not used, an early withdrawal could trigger penalties and extra taxes. 

Alternatives to Splitting a 401(k) in Divorce

Spouses can agree to alternatives instead of splitting a 401(k) in their divorce. Some alternatives include offsetting the 401(k) amount with other assets. For instance, one spouse can keep the 401(k), while the other receives a larger part of a home’s value. The non-account holder could get an equivalent of stocks, bonds or cash instead of the 401(k). If both spouses have retirement accounts, they may agree to keep their respective accounts instead of splitting them. 

You could also opt for a buyout. The spouse who decides to keep the 401(k) compensates the other for their share in cash or assets.  

Splitting vs. Offsetting a 401(k) 

Tips for Protecting Your 401(k) in Divorce

Your 401(k) represents funds you’ve accumulated while working, and it is natural to want to protect it as you work through your divorce. You can do the following to protect your 401(k) in your divorce: 

• Document important information. Keep track of what you contributed to your 401(k) prior to getting married. Also, you want to document account balances throughout the duration of your 401(k). 

• Keep thorough records. Maintain any relevant information that is related to your 401(k) including statements and tax returns. 

• Work with a financial advisor. A financial advisor can help devise the best strategy to help answer your questions regarding the growth potential of your 401(k).

• Consult with a divorce attorney. Talking to your divorce attorney will help you devise a strategy regarding your assets in the divorce. 

• Formulate a comprehensive financial strategy. Consider forming one at the beginning of your divorce. Don’t be afraid to ask questions and get the information you need to protect your assets. 

Final Steps After Splitting a 401(k)

Once the 401(k) is split, there are still a few steps you don’t want to forget. Review your beneficiaries and update them so they accurately reflect your preferences. 

The divorce will likely reshift your finances. Talking to a financial advisor to reset your financial strategy may help prioritize how you want to save and handle your assets and liabilities. 

At the very least, you want to use direct rollovers to transfer funds and comply with all IRS rules to avoid penalties. If you decide to take a distribution, consult with a financial advisor on potential penalties. 

Final Take 

Contributions to a 401(k) plan during marriage are treated as marital property. Contributions that occurred prior to marriage are treated as separate property. 

Generally 401(k) plans are divided through a QDRO. A QDRO is an order filed and signed by the court that legally splits the retirement account. State laws will impact the split. Community property states typically split the 401(k) plan equally, while equitable distribution states split it with fairness factors in mind. Those who don’t want to split the 401(k) can exchange assets in place of dividing the retirement plan. 

It is best to consult with professionals to make certain this process is smooth. Consult with a divorce attorney, a 401(k) plan administrator and a financial advisor to come up with the best retirement and future strategy. 

Share This Article: