Even when the marriage ends on friendly terms, divorce is never easy. The whole process can be drawn out and painful for both parties, especially when it comes to splitting up a 401k. While both spouses want their own portion, they often refuse to share with each other. That may result in a lot of resentment on both sides.
While some hard feelings might be difficult to avoid, the whole process can go much smoother if the parties know what to expect. That’s why they should inform themselves about what exactly happens to their retirement fund after the divorce.
What Is 401k?
In simple terms, a 401k is a retirement account sponsored by an employer. Basically, an employee can take a percentage of their pre-tax salary and put it into their retirement fund. The employee and the employer determine together what that percentage will be, but typically, it’s around 10-15% of the income.
Even though a 401k is a retirement fund, the employee who owns it can borrow from the fund before they officially retire. Depending on the plan, some can take out up to 50% of the savings. However, these withdrawals come with penalties when they are made before the employee turns 59½.
It’s essential to understand the difference between the traditional IRA retirement fund and 401k. IRA is entirely independent of the employer, and any individual can open it, regardless of their employment status. On the other hand, only an employer can offer a 401k.
What Happens to 401k After a Divorce?
Any funds deposited into 401k during the marriage count as marital property. As such, they will be divided during the divorce unless both parties sign a prenuptial agreement. In such a case, the court will follow the decisions stipulated in the prenup when deciding whether and how to split a 401k.
If there is no prenup, though, the court will likely follow the principle of equitable distribution. In other words, it will determine, on a case-by-case basis, what percentage of 401k each spouse should get. When making the decision, the court will consider the following factors:
● Duration of marriage
● Age, health, and special needs
● Primary custody of children
● Present and future financial liabilities and needs of each spouse
● Earning potential and financial well-being of each spouse
● The value of each spouse’s separate property (find out if separate bank accounts are
● Each spouse’s adverse actions
If one spouse is unable to work or generally is not as well-off as the other, they’re likely to receive a larger percentage of the 401k. The same goes for the spouse who has primary custody of the children and is their main caregiver.
In some states, courts divide all marital assets equally between the spouses, including the 401k. However, those include only Arizona, California, Texas, Washington, Louisiana, Nevada, Idaho, Wisconsin, and New Mexico. Most states enforce equitable distribution, and Pennsylvania is no exception.
Can You Protect Your 401K in a Divorce?
Before reaching its final decision, the court takes the time to review known facts about the parties seeking the divorce. That process also involves a negotiation stage, during which each side can present its case. If a spouse wants to protect their 401k, that may be the perfect moment.
The best way to do that is to offer the other party something else instead of the 401k funds. If both parties can reach an agreement, the court will likely honor it.
If that’s not possible, though, the spouse who wants to keep their 401k can still attempt to make their case to the court. For instance, if they implement certain lifestyle changes, sell their house, or gather evidence proving they deserve more money, they might still win. Ultimately, a good attorney should know how to best approach this issue.
Final Remarks
According to Pennsylvanian laws, a 401k is marital property, and as such, it falls under the principle of equitable distribution. As a result, either spouse could get a larger share of the funds depending on their circumstances, assets, and incomes. It’s important to keep that in mind during the divorce process and discuss the options with an attorney from a reliable divorce law office in York PA.
If possible, it’s always wiser for both parties to settle an agreement during negotiations. That way, many of the unpleasant and painful situations can be entirely avoided, and both spouses may end up satisfied.