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How is a 401(k) divided in a divorce?

On Behalf of | Dec 30, 2021 | Divorce | 0 comments

Past posts on this blog detail the topic of property division during divorce proceedings in North Carolina. From a high-level perspective, such a task may seem simple: those assets that one brings into a marriage constitutes separate property, while any assets obtained during the marriage become subject to equitable division. Yet as is the case for many aspects of a divorce, in reality, things are rarely that simple.

One need only consider the division of a 401(k) account to reinforce this fact. Many might assume that a 401(k) account falls under separate property (especially if it already existed prior to one’s marriage). However, any contributions made to a 401(k) during a marriage come from marital income (thus making them marital property). The division of these funds can involve a number of different complexities.

Dividing up retirement assets

Typically, when handling a 401(k) account, the court issues a Qualified Domestic Relations Order. A QDRO opens the door to a 401(k) plan provider to make disbursements to an alternate payee (in this context, that is the non-contributing spouse). The sponsor may then divide up the assets subject to division into two separate funds, with each side then assuming control over their respective accounts. Both the contributing and non-contributing spouse then have the option to allow those funds to continue to grow over time or take a disbursement (divorce is one of the few scenarios where early disbursements do not result in tax penalties).

Keeping one’s full 401(k)

One contributing to a 401(k) may worry about how dividing it might impact their retirement plans. According to the 401(k) Help Center, retaining their fill account may be an option. However, to do so, their ex-spouse must relinquish their interest in it. That likely requires the contributing spouse to give up their stake in another marital asset of comparable value.