Divorce + 401k = A Difficult Situation

Despite the best of intentions, 50% of all marriages end up in divorce. Often, the effect is devastating on a variety of levels including the household finances, the emotions of spouses and their children, friends and relatives. A divorce is not as simple as just dividing up the music collection and figuring who gets the family pet, it is figuring out a clean and equal distribution of assets accrued by a number of means during the length of the relationship. One such asset that will often get divided is a 401k investment strategy.

401k Assets Divided

Although the nuances of divorce and marriage laws vary from state to state, it is commonly believed that a 401k portfolio is marital property. If a person enters the marriage with a sizable 401k and ceased making contributions during the marriage, it is arguable that those assets should be solely those of the original earner. However, any money contributed to the fund during the course of the marriage will more than likely be considered fair game by the opposing lawyers.

Safeguarding Your Portfolio

The money in a 401k plan that is subject to legal disbursements are divided via a qualified domestic-relations order, or QDRO. The QDRO covers child support, alimony or marital property rights. When the QDRO is enforced, part of the assets of one person can be assigned to another, typically (although not necessarily) a spouse.

If you are thinking that your spouse may try to sabotage your savings in a 401k plan due to a divorce, make sure to alert the account manager so they can “red flag” the account.

Your best plan of action if you are about to get a divorce is to seek legal consultation to figure out the marital property laws of your state. In the long run, it will be worth sacrificing a portion of your 401k to enjoy a clean and unencumbered break.