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What can I do to protect my 401(k) in divorce?

On Behalf of | Dec 10, 2021 | Divorce

The idea of dividing up your 401(k) between you and your spouse in your upcoming divorce is probably a troubling development. You may view your 401(k) as an important part of your retirement. Losing too much of your 401(k) could endanger your retirement plans. Fortunately, it is possible to preserve some or even all of your 401(k) depending on your circumstances.

The Motley Fool describes some possible steps available to you as you seek to preserve at least a significant portion of your 401(k) assets from division in a divorce.

Identify your pre-marital 401(k) funds

Remember that your marital property is at stake in your divorce. You should be able to hold on to any separate property that you own. Think about when you first set up your 401(k). If your account existed before you got married, you may identify how much money you had placed in your account prior to your marriage and claim it as your separate property. This should leave the amount acquired during your marriage as eligible for division.

Trade assets for your full 401(k)

It is possible you may not have to divide your 401(k) at all. If you figure out your spouse’s share of your 401(k), you could offer to trade assets of equal value in exchange for keeping the full contents of your account. You may trade off a valuable piece of art, a vehicle or even your share of the marital home if you think holding on to your 401(k) is worth it.

Properly divide your account to avoid losses

If splitting your 401(k) is inevitable, choose a method that will minimize taxes and fees. Using a qualified domestic relations order to divide your account is one option. If you directly withdraw funds from your 401(k) to pay your spouse, you could incur taxes and a penalty if you are younger than 59 and a half years old. Another option is to roll your 401(k) into an IRA and provide your spouse’s portion in a separate IRA. This can work only if your plan allows for such a division.

Even if you must divide your 401(k), the right planning may help you avoid losing money that you could have otherwise held on to. Consider the options that best fit your situation.