401k/ Retirement Accounts

Let’s discuss what happens with a retirement account or a 401K account and how that may be involved in your divorce or legal separation or even in a post-decree matter. A post-decree matter means that you’ve already gone to court, you have had a judge enter a decree or a legal separation or a decree of dissolution of marriage, and in that decree of dissolution of marriage, one of the parties or both of the parties had IRAs and retirement accounts or a 401K that had to be divided. In a post-decree case, most often what we see is that somebody has not done what they’re supposed to do and has not followed the Orders of the Court. As an example, let’s say that the IRA accounts were to be divided 50/50 in the divorce; the husband had a $200,000 IRA account and he was supposed to give wife half or $100,000 as part of the 50/50 agreement. If the party did not follow the Orders of the Court and did not give the ordered share to the ex-wife, the remedy would be to go back to court to Enforce the Orders of the Court. Thus, this is a post-decree issue.

In the typical divorce case where there are 401K or retirement accounts, the court will divide those accounts down the middle. That’s pretty much what you can expect. Despite the fact that there is no law that says that the court has to divide everything 50/50, generally speaking, a marriage of any kind of length, 4 to 6 years, or longer, the court is going to take into account who’s contributed to the 401K and whether or not that was a contribution made over the course of the marriage. If the 401k or retirement account(s) were begun prior to the marriage, the court will consider the value of the account(s) at the time of the marriage and will calculate the division of these assets accordingly.

Avoiding a 10 percent tax penalty while rolling a spouse’s retirement account directly to an IRA is important to address and can be achieved when relying on an experienced attorney familiar with these issues. When the assets are allocated under the Qualified Domestic Relations Order or QDRO, a one-time opportunity for parties under the age of
59 ½ to withdraw money from their ex’s 401(k) or 403(b) without owing the normal 10% tax penalty exits.
So if you’ll be receiving your spouse’s retirement account and will need to tap it to pay for some unavoidable divorce expenses, you may want to make the withdrawal rather than doing a rollover. Otherwise, if you roll the money into an IRA then need to pull some out for divorce costs, you’ll be subject to the standard 10% early-withdrawal penalty if you’re under 59 1/2.

For those clients over the age of 50, who will need to live on savings for 20-30 years in retirement, it is recommended to take the time to assess their current and future cash flow to determine how much will be needed to live on in retirement. For these clients, we often recommend that an expert CPA be consulted to properly pave the road for a successful financial future.

Contact Shayne Law if you have any questions.