What Will Happen To Your 401K During Divorce?
If you are thinking about ending your marriage, or you have already started the divorce process, you may know that your marital assets will be divided during divorce. While you may be mainly concerned about the family home or vehicle, there are other assets that are often overlooked during the process. One asset you may not immediately think of during this difficult time is the 401K you and/or your spouse accumulated while you were married.
Dividing a 401K can become very complicated. Unlike other types of property such as furniture and vehicles, there are many factors considered when dividing a 401K. Below, our Media property division lawyer explains what these are.
What Portion of 401Ks are Classified as Marital Property?
Only marital property is divided during divorce. Marital property includes any assets and liabilities the couple acquired together after they were already married. On the other hand, separate property refers to any assets and liabilities a person acquired before they got married.
Many people have already started contributing to a 401K before they got married. This is especially true today when more people are waiting longer to wed. Any funds accumulated in a 401K prior to the wedding are classified as separate property. Likewise, any funds accumulated in a 401K after the wedding are classified as marital funds and therefore, are subject to division.
During divorce, both parties often have 401Ks. Instead of dividing them, both sides may agree to each keep their own. This is particularly beneficial when both 401Ks have approximately the same value.
Tax and Penalty Implications when Withdrawing from a 401K
401Ks are retirement accounts, meant to help people support themselves once they are no longer in the workforce. To encourage people to keep the funds in the account and have what they need for retirement, there is typically a ten percent penalty applied to any funds that are withdrawn from the account early. If funds are withdrawn from a 401K as part of divorce proceedings, though, the ten percent penalty is waived.
Although you may not have to pay the ten percent penalty when withdrawing these funds as part of the divorce process, there are still tax implications to consider. Any funds taken from a 401K are considered taxable income, so you will have to pay taxes on any funds you receive. Rolling the funds over into another account such as a different 401K or an IRA can protect you from these tax implications.
Tax implications may not sound like a major factor, they can tally up to thousands of dollars. If you have a right to a portion of your spouse’s 401K but want to avoid the taxes associated with it, you may instead choose to accept other property with an equal value.
Our Property Division Lawyer in Media Can Help with 401K Issues
There are many ways to divide a 401K during divorce, or you may choose not to divide it at all. At Barbara Flum Stein & Associates, our Media property division lawyer can review the facts of your case and advise on the best course of action to help you get the full settlement you deserve. Call or text us now at 610-565-6100 or chat with us online to request a consultation and to learn more.
legis.state.pa.us/WU01/LI/LI/CT/HTM/23/00.035..HTM
legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=23&div=0&chpt=33&sctn=1&subsctn=0
