It’s a small miracle, but you and your spouse actually agree on most of the financial aspects of the divorce. You‘re keeping the house, he wants the car. He wants the big TV, but you hardly watch it anyway. You’re willing to make compromises as long as you each receive a fair amount—but what happens when it comes to dividing up your retirement funds? How can you know what’s “fair” if you’re not sure what to do with the money until you both reach retirement age?
Things to Consider When Dividing a 401k Account During Your Divorce
The first thing you should know about dividing your retirement funds is that Washington is a community property state. This means that all assets and debts that accrue during the course of a marriage are considered equal property of each spouse, and shall be divided equally in a divorce.
The next important factor in splitting the funds is how to go about apportioning the money between you. Here are some things all divorcing spouses should consider before dividing their 401k:
- Consider a trade. Many spouses will trade property for another item of a similar value. This can be done with a retirement account in your name. Your spouse should relinquish any claim to the funds in the account in writing, and you should exchange another asset that makes up for the difference.
- Consult an accountant. The net worth of your retirement assets may be drastically different than the current amount in the account. For example, retirement funds accrue more and more interest as the years pass, but are also subject to taxes upon withdrawal. You should consult a CPA or an attorney to find out the true value of each retirement plan and how much will be in the account when you are ready to stop working.
- Take a payout. Spouses can opt for a one-time, lump-sum payment that releases them from any future claim on the retirement funds. You should consult with an attorney to find out if this is the best option for you.
- Leave it alone. If you and your spouse are on good terms, you may consider leaving the retirement funds alone to accrue interest as the years go by, with the understanding that you will each receive a fair portion at retirement age.
Once you and your spouse have agreed on how to split the 401k, you will need to sign two documents: a divorce settlement agreement that ensures that each of you will not dispute property decisions in the future, and a Qualified Domestic Relations Order that gives the court the right to enforce the decisions you have made. For more information on how to prepare these documents, download a FREE copy our book, The Savvy Woman’s Guide to Divorce in Washington.