How is a 401K Handled in Divorce?
Divorce settlements can be excruciating. They often last an extended period of time and lead to an excess amount of stress and confusion. There’s a lot to know about what you or your soon-to-be ex is entitled to in a divorce. One major question that prevails through divorce hearings is how a 401K is handled. A 401K is a retirement savings plan that is sponsored by an employer. Employees can add contributions to this automatically through their payroll at work. Traditionally, these funds are not taxed until the employee withdraws the retirement money. The thing about 401K’s and divorce is that your spouse is legally entitled to a portion – or all – of your benefits in a settlement. In most cases, you must find a way to fairly split the funds. If you understand the process, your rights, and your legal options, you should be able to reasonably split or divide your 401K. If you have questions about how your 401k will be handled, contact attorney Michelle Cimino for a confidential consultation. Recognized as one of the top divorce lawyers in Rochester, NY, let her 20+ years of experience work for you.
Know Your Plan
Depending on the 401K plan you’re registered in, your funds may be handled differently. Each plan has its own separate set of benefit regulations which is established by the employer and administrative rules.
For example, some businesses may establish earnings by percentage. Others may divide earnings by shares.
Additionally, there may be some provisions that allow an ex-spouse to take a portion of the funds at the time of divorce, but others may require the recipient to wait until retirement when funds are taxed and released. You must learn the happenings of your plan before you proceed with divorce, as this will allow you to seamlessly transition through this step.
Common Options for How is a 401K Handled in Divorce and 401K Settlement
After learning the regulations surrounding divorce and your 401K plan, you can begin analyzing which settlement option could be best for you. Often times, you’ll have at least one or more of the below options for settlement of your 401K.
The first option is you keeping the entirety of your 401K and your spouse receives other assets of comparable value to the funds in your 401K. This option is often seen the most favorable among lawyers as it reduces the potential of future conflict. This option, however, requires careful financial calculations. First, you must consider the long-term tax consequences within the 401K, and second, the value – both short and long term – of assets must be recognized. Your spouse might also be concerned about how much your 401K will grow from that point on and desire equal assets on the expected earned amount over time.
A second option is splitting the 401K assets equally between you and your spouse. For this, you’d need a QDRO – pronounced “Quadro” – which stands for Qualified Domestic Relations Order. This is a court order that legally decrees the split of assets.
Next, you could liquidate the portion of your 401K that satisfies the QDRO. This allows you to give a lump sum of your 401K earnings to your spouse at the time of divorce. This option is not always accessible or desirable because of the tax consequences that appears with this choice.
The fourth common option for splitting a 401K is rolling a portion of it to the ex-spouse in the form of an IRA. This option is more limited – it’s only available if you’ve reached the age of 59 ½ or if you’ve left the company that holds the 401K. If you fit these requirements, though, this could be appealing if your spouse desires investment options.
If each of you have separate 401K’s, these rules change to depend on what each party desires. Sometimes, divorcees can only agree on splitting these 401K assets equally, but others may want to avoid legal paperwork like the QDRO and just keep their own 401K plans entirely.
Need Help? Contact Our Rochester Divorce Lawyers Today!
Here at The Cimino Law Firm, Michelle Cimino has over 20 years of experience in law and can help you through your divorce as seamlessly as possible.
Be sure to contact us today to schedule an appointment for your confidential consultation – we’ll review your case and tell you how we can help you best! Instead of living stressed through divorce, have our Rochester divorce attorneys to support and back you up.
Michelle Cimino, Esq. is recognized as one of the top divorce lawyers in Rochester, NY and represents clients throughout Rochester including Monroe County, Orleans County, Livingston County, Ontario County, Wayne County, Genesee County, and Wyoming County.
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