How Will My Divorce Affect My 401K?

Divorce is rarely pretty, especially when it comes time to divide the marital assets. If you or your spouse has a 401k retirement plan, the funds that have accumulated are fair game for the settlement. You have legal claim to your spouse's retirement funds, just as he or she has legal claim to yours. The best way to reach an equitable agreement where retirement funds are concerned is to do your research ahead of time so you have a clear understanding of the rules and regulations regarding splitting up a 401k in the event of a divorce:

The Plan Dictates the Options

Depending upon the type of plan you have, you'll have several options available to you when it's time to divvy up your funds:

  • By shares
  • By percentages

Some plans will allow for lump-sum payouts at the conclusion of the divorce while others will require both parties to wait until retirement age to divide funds. Familiarize yourself with the options offered by your plan so you know what to expect.

Methods of Settling

There are several methods of settling the division of a 401k during divorce:

  • Opting to keep the fund intact and substituting other marital assets to take its place.
  • Splitting the account into two separate accounts -- one for you and one for your spouse. Only the initial owner of the account will be able to continue to make contributions, but the spouse will be able to make investment decisions for his or her portion. 
  • Liquidating the funds and making a lump-sum payout to your spouse.
  • Rolling your spouse's portion of your 401k over into a separate retirement account.

Not all options will be available in all instances. Your particular circumstances may very depending upon your age, your employment status or other factors. The best way to decide how to split your retirement benefits is to become knowledgeable about your plan and to speak with an attorney who specializes in 401k disbursement in the event of a divorce. 

When it comes time to talk about how you want to handle your retirement funds during your divorce—whether you opt to keep the account intact or decide to divide it up equally—make sure you've done enough homework to know how far your financial rights extend. It can be painful to lose a portion of your lifelong earnings to an ex-spouse, but according to the law, both spouses are eligible to benefit from a single 401k.