Wondering how to to protect your 401k in your divorce? Here's what you need to know, from attorney and Qualified Domestic Relations Order (QDRO) expert Emily W. McBurney. Have questions? Ask in the comments.
The easiest way to protect your 401(k) assets is to have a prenuptial agreement. These agreements are not just for the rich and famous –- they are a practical and valuable way for a couple to spell out how their finances will be handled during their marriage. Prenups usually establish what is going to be considered “separate property” that will not be divided up in a divorce, and “marital” or “community” property, which will be included in the assets (or debts) to be divided during a divorce. A prenup can specify that your 401(k) will be considered your separate property in the event of a divorce. You can even establish that any contributions that you make to the account during the marriage will be considered separate property. Otherwise, under most circumstances, those funds will be part of the marital assets that will be allocated between the parties.
Even if you don’t have a prenup, there are a few things you can do to protect your 401(k) from being awarded to your soon-to-be former spouse. First, stop making voluntary contributions to your 401(k) as soon as you are legally permitted to do so. Consult with a family law attorney in your jurisdiction before taking any action, but stop contributing as soon as you are legally permitted under the divorce laws in your state. Divorce cases can drag on for years, and I frequently encounter clients who are unhappy that contributions made long after their separation are still considered marital property.
Another way to preserve at least some of your 401(k) is to push to exclude the funds that were in the account before you were married. This depends a lot on circumstances and state law, but many people don’t realize that it is possible to divide only the funds that were contributed during the marriage and leave the pre-marital portion to the spouse who earned it before the marriage. Maintain your 401(k) account records carefully so you can easily prove how much it was worth before you walked down the aisle. As with so many things in life, thinking ahead and being thorough can make all the difference in determining whether you keep your 401(k) after the divorce.