Married couples often plan jointly for retirement. However, actual retirement savings accounts and pensions are often only in the name of one spouse. Maybe one spouse has enough income to put them right at the edge of a higher tax bracket. Perhaps their employer makes matching contributions to a 401(k) account.
There are many reasons why people choose to use 401(k)s and similar tax-deferred retirement savings accounts. Couples can reduce their taxable income for the year and set aside resources for when they have to live on a fixed income later in life.
Does the spouse who funded the 401(k) get to keep those savings as their separate property as part of the asset division process of a divorce?
Marital income is subject to division
Timing is a key consideration when dividing resources during divorce proceedings. Spouses can protect assets that they acquired before marriage and income that they earned before marriage as separate property. Still, people generally have to report what they earned or acquired during marriage as marital property.
Even in cases involving assets held in the name of one spouse and obtained with only their income, those resources may still be subject to division during a divorce. A 401(k) funded with marital income is typically at least partially subject to division in the event of a divorce.
Spouses may need help calculating how much of the account is separate property. If one spouse began funding the 401(k) before marriage, they can potentially preserve the premarital contributions as separate. However, the amounts contributed during the marriage, including employer contributions, are likely subject to division in the divorce.
Spouses may be able to split retirement savings without incurring penalties and facing income tax complications. Provided that they use a qualified domestic relations order (QDRO), they can theoretically split a tax-deferred retirement savings account without any penalties. It may also be possible to use the value of the 401(k) to influence other property division decisions.
Having support when analyzing the marital estate and establishing expectations for property distribution can be beneficial for those on the verge of divorce. Retirement savings, including 401(k)s and pensions, can often complicate divorce proceedings, but seeking legal guidance can help.