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How to protect a 401(k) in divorce

On Behalf of | Nov 5, 2021 | Divorce

Many states, including North Carolina, use an equitable distribution method to divide martial property in a divorce. This means the court will oversee a distribution of property that is fair to both parties, but not necessarily a 50/50 split. Since many couples have at least one 401(k) retirement account between them, the question becomes what will happen to those assets during divorce.

Distribution of 401(k) fund

Unless the couple has a prenuptial agreement specifying otherwise, the funds in a 401(k) account are considered marital property and are subject to division in divorce. In the case of only one 401(k), such as in the case of one working spouse and one stay-at-home spouse, the court may simply divide the 401(k) in half and award each party his or her share. However, if both parties have a 401(k) and the amounts are similar, the court may elect to allow each party to keep his or her account.

During mediation or the collaborative process, couples may create an agreement regarding their 401(k)s on their own and come up with a plan for the equitable distribution of property that does not touch the 401(k) account. Perhaps one spouse wants to keep a vacation home or other valuable asset instead. Each couple will have their own reasons, but if they do decide to split up the 401(k), divorce is one of the few times where an account holder can withdraw funds without tax penalties by using a Qualified Domestic Relations Order (QDRO).

Knowing one’s options important

Considering all the aspects involved in a divorce, a spouse would do well to work directly with an experienced family law attorney from the onset. Even if the couple can work amicable toward their own agreement, having a lawyer on hand will help to ensure a spouse fully understands his or her rights and that he or she receives his or her fair share of all marital assets. A lawyer will also be able to present the couple’s agreement to the court for final approval or be on hand to address any issues that may arise during the divorce process.