Splitting a 401(k) or Other Retirement Accounts in DivorceAugust 7, 2023
Divorce can be a complex and emotional process, and one of the most challenging aspects is dividing up assets, including retirement accounts. A 401(k) is a common type of retirement account that many people rely on for their future financial security. However, when a couple decides to end their marriage, the division of a 401(k) can become a contentious issue.
How Are Retirement Accounts Divided in Divorce?
The first step in dividing a 401(k) is determining if it is considered marital property. In Pennsylvania, any assets acquired during the marriage, with the exception of gifts from third parties, are considered marital property and are subject to division in a divorce. This includes 401(k) accounts, even if only one spouse contributed to the account. However, if the 401(k) was acquired before the marriage or through inheritance, it may be considered separate property and not subject to division. Still, the growth on the account during the marriage would be considered marital.
Assuming the 401(k) is considered marital property, the next step is determining how to divide it. The most common approach is a Qualified Domestic Relations Order (QDRO), a legal order that divides a retirement account between divorcing spouses. A QDRO allows for transferring funds from one spouse’s 401(k) account to the other spouse’s account or a separate account established for the non-employee spouse.
What If My Husband Cashed Out His 401(k) During Divorce?
If a husband or wife cashed out a 401(k) during the divorce proceedings, this could complicate the division process. Depending on the timing of the cash-out and the specific circumstances surrounding it, the funds may be considered marital property and subject to division. However, if the cash-out occurred before the divorce proceedings began, the remaining funds, after taxes and penalties, may be the only portion subject to distribution.
Let’s say a husband did cash out his 401(k) during the divorce without the wife’s consent. The wife may still be entitled to a portion of the funds that were cashed out, pre-tax and penalty. This may be accomplished by adjusting the overall division of assets to account for the missing funds or by using other assets to offset the value of the funds that have been spent.
It is important to note that cashing out a 401(k) during a divorce can have significant financial consequences for both parties. The spouse who cashes out the account may be subject to taxes and penalties, which can significantly reduce the value of the funds, and they may still be accountable for funds spent on taxes and penalties in the distribution. Additionally, the spouse who does not cash out the account may be left with a smaller portion of the overall marital assets available for distribution, impacting their future financial security.
Work with a Divorce Attorney in Harrisburg, PA
Dividing a 401(k) in a divorce can be complex and challenging, particularly if one spouse cashes out the account during the proceedings. It is essential for both parties to understand their rights and obligations and to work with experienced legal and financial professionals to ensure a fair and equitable division of assets.
While the emotions involved in a divorce can make it challenging to navigate these issues, taking a careful and strategic approach can help both parties achieve a positive outcome and move forward with their lives. If you need help during your divorce proceedings, contact the divorce attorneys at Daley Zucker.