Funding a 401(k) can be a financially advantageous choice. People reduce their taxable income for the year by making pre-tax contributions. They can increase their actual earnings if they qualify for employer-matching contributions.
A well-funded 401(k) can provide enhanced financial stability during retirement. However, deposits made during a marriage are potentially subject to division when the account holder divorces. Even if the account is only in the name of one spouse, it could be at least partially marital property.
Can people protect their 401(k) accounts during divorce litigation or negotiations?
Settling can protect resources
Divorcing individuals almost always have the option of settling with their spouses. In such scenarios, they control what happens to their property. The spouse who feels strongly about retaining their 401(k) could potentially make compromises in other aspects of property division that allow them to achieve that goal.
Paperwork can protect funds as well
Many people fear the early withdrawal penalty if they must split a 401(k) during a divorce. What they may not know is that it is possible to divide a 401(k) without a 10% penalty or income tax consequences.
If the spouses have an attorney drafting a qualified domestic relations order (QDRO) and follow the right procedures, they can divide the account without diminishing its overall value due to penalties or incurring income tax liability. A QDRO that reflects the property division order allows for the penalty-free division of a 401(k) or similar account.
Setting clear priorities early in divorce proceedings can help people achieve certain goals. Protecting retirement resources is often a realistic goal if people can compromise in some aspects of property division and make proper use of the tools at their disposal.