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Dividing a 401(k) in a divorce

Property division proceedings present a number of complexities as divorcing couples attempt to cope with what family courts in Virginia considers to be marital assets. One asset subject to such action that often becomes a source of considerable contention is a 401(k) account.

Contributions made to a 401(k) account during a marriage come from marital income (thus making them shared assets). Yet the impact that dividing up their 401(k) may have on their retirement plans may make one contributing to such an account may prompt them to question whether there is a way to retain the entire fund.

Keeping one’s full 401(k)

According to the 401(k) Help Center, one can fight to keep their full 401(k) in their divorce. Yet doing so requires that the non-contributing spouse must consent to relinquish their stake in it. To incentivize them to do, the non-contributing spouse will likely have to give up their interest in another marital asset of equal value. One considering such a proposal should weigh the pros and cons of it: while it allows them to keep their retirement plans largely intact (at least from a financial perspective), it may require them to give up a significant amount right now (as the court values the contributions at their potential future value).

Understanding the alternatives

Should one determine that fighting for their full 401(k) requires too great an immediate sacrifice (or should their ex-spouse reject their proposal to do so), the common course is instead for the court to issue a Qualified Domestic Relations Order that authorizes a 401(k) plan provider to divide an account into two. Per the website, both sides also have the option to cash out their portion of a 401(k) (as divorce allows for early 401(k) withdrawals without incurring tax penalties.