Negotiating the division of property during divorce settlements may not be easy. Here’s how to protect your 401(k) during divorce litigation.
Contributions made to a 401(k) account during the marriage become marital property unless a prenuptial agreement determines otherwise. However, a spouse can protect assets they contributed to their 401(k) account before marriage by documenting the demarcation of their contributions.
How is 401(k)’s split during a divorce?
A 401(k) may be subject to a two-fold division during divorce. The way a 401(k) is split between spouses depends on where they live, the balance of each 401(k), how the government taxes the 401(k), and the value of other material assets.
The division of assets regarding 401(k)s likely follows marital property law, which requires the marital property to be divided equitably.
Related: What Happens to Your 401 (k) in a California Divorce
Exceptions include:
Contributions made before a marriage
Contributions made to a 401(k) plan prior to the date of marriage are considered separate property. The amount a spouse has contributed to a 401(k) account before their marriage is protected during divorce settlements.
A valid prenuptial agreement is in place
If a prenuptial agreement exists protecting the 401(k) from marital property, the 401(k) is not included in the division of assets during divorce settlements.
Related: What a California Prenuptial Agreement Can and Can Not Do
Protecting your 401(k) before divorce
If a couple does not sign a prenuptial agreement before their marriage, they can sign a postnuptial agreement to protect their personal assets from becoming marital property.
A postnuptial agreement, also known as a “postnup,” is a legal contract between a married couple outlining the division of assets and liabilities in the event of a divorce. Married couples sign postnuptial agreements in order to expedite the divorce process or to layout terms differing from state guidelines regarding the division of marital property. Within a postnuptial agreement, spouses can establish ownership of certain assets, including their 401(k), during the marriage in order to discern what should be treated as separate property.
Advantages to postnuptial agreements
- Can quicken the divorce process
- Protects personal assets
- Can lay out terms differing from state guidelines regarding the division of assets
Disadvantages of postnuptial agreements
1. Requires the cooperation of spouses
Both parties making a postnuptial agreement must sign the agreement voluntarily and intentionally. If a spouse is unwilling to sign off on a postnuptial agreement protecting their partner’s 401(k) from the division of assets, the postnuptial agreement cannot protect those assets.
How to protect your 401(k) during divorce
1. Minimize taxes and fees
Taxes and fees can set a spouse’s retirement plan back. To avoid losses, a spouse can file all proper paperwork and plan how to divide their assets. A spouse can also consult with a divorce attorney to minimize the taxes and fees they pay.
2. Consult with professionals
Consider reaching out to a social security benefits plan administrator, pension plan administrator, or retirement and savings plan financial advisor
Negotiate with your spouse
During the negotiation phase of the divorce, a spouse may offer their ex other marital assets of comparable value rather than money from their 401(k). However, doing so requires collaboration and might not work if spouses are not on good terms.
If negotiations do not work, a spouse can review options to keep as much of their 401(k) as possible. A spouse can consider selling their home, gathering evidence to keep as much money as possible, putting more money into a 401(k) after divorce, and how close they are to social security.
Dividing marital assets during a divorce can get complicated. If possible, keep an open line of communication with your spouse to negotiate a solution that serves both of your best interests.
FAQs About Protecting Your 401(k) in a Divorce
Can I hide my 401(k) from my spouse during a divorce?
No, it is illegal to hide your financial assets during divorce. During divorce proceedings, both spouses are required to tell the truth about their financial and personal information. Hiding a 401(k) account during divorce proceedings is perjury.
What can I offer my spouse in exchange for 401(k) money?
During negotiations, you may offer your spouse different marital property in exchange for money in your 401(k). You could offer property, separate income, or any other marital property of comparable value?
When is it too late to get a postnuptial agreement?
It is never too late for spouses to sign a postnuptial agreement. As long as a couple is married and willing to cooperate with each other they can sign a postnuptial agreement anytime during their marriage.
Related: Should I sign a Postnuptial Agreement?
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If you or a loved one would like to know more about how to protect your 401(k) during a divorce, get your free consultation with one of our divorce attorneys today!