What You Need to Know about the Status of Your 401(k) in a California Divorce
When a couple decides to get a divorce, finances, asset division, and retirement plans often become topics of concern. Here’s what happens to your 401(k) in a California divorce.
A 401(k) is a tax-qualified plan for retirement and investment offered by one’s employer. Essentially, money is automatically withdrawn from one’s paycheck and invested into funds of varying risk selected by their employer. The employee then receives a tax break based on the amount of money they contribute. Within the context of a California divorce, one’s 401(k) can potentially be divided equally between two spouses, depending on when the 401(k) was opened. One’s spouse could receive up to half of the money that was acquired from the 401(k) during their marriage.
Context on the Division of Assets in California
In California, marital assets are divided on a community property basis, which means that employee benefits, any assets acquired during the marriage, and the retirement plan have to be split in half. It is important to remember that any type of retirement plan is included in this regulation, whether it be an employment, family-owned, or conventional private plan. While it is possible for a spouse to receive up to 50% of one’s retirement plan, the spouse is only entitled to the money accrued to the plan during the marriage. For example, if one worked 100 months in their career, yet was only married for 50 of those months, their spouse is entitled only to the assets acquired during the 50 months of work during their marriage.
How to Divide A 401(k) Plan in a California Divorce
Even in the likely circumstance that the spouse is entitled to half of the 401(k) when divorcing, there are different options available on how to divide the plan. If one has not already retired nor plans to in the near future, negotiations will begin between each spouse’s respective attorneys to reach these decisions. When evaluating these options, spouses should consider any future tax implications.
If both spouses agree to this, they each can receive their payouts from the 401(k) when the participant cashes it in. In this case, the participant is the spouse who has the retirement plan with their employer.
Another avenue to take is for the participant spouse to receive all assets from the 401(k) plan specifically, and their spouse can receive their assets from another part of the community property.
The participating spouse can fill out a Qualified Domestic Relations Form (FL-460), which would allow them to place assets into a qualified plan in their spouse’s name. The plan would be tax-free and not subject to any penalties.
Can a participating spouse make withdrawals from their 401(k) before getting their divorce?
While it may be in the interest of the participating spouse to withdraw from their 401(k) if they are getting divorced, the assets are considered community property under the law. If the participating spouse tried to take out large sums of their retirement savings, they could face penalties in court, which can make a dip into the amount of the 401(k) that they are entitled to. It is important to remember that these penalties would only apply to funds withdrawn in the interest of the participating spouse. If money was withdrawn prior to the divorce in the interest of both spouses’ community property, whether it be for financial hardship or to reduce debt, the court will likely excuse your premature withdrawals of money.
If you have any more questions about what happens to your 401(k) in a California divorce, contact us. We’ll get you in touch with the most qualified attorney for your unique legal situation. Get your free consultation with one of our Property Division Attorneys in California today!