How is a 401(k) divided in a divorce?

What is marital

A 401(k) is a defined contribution plan with an account balance. Contributions made during the marriage, and the growth on them, are marital property. The balance on the date of marriage, and the growth on that premarital money, is separate property if it can be traced. Utah courts divide the marital portion equitably, which is often but not always 50/50.

Tracing the premarital balance

The premarital balance is not simply the number on the statement closest to the wedding date. The separate portion grows or shrinks with the market from that date forward, while new contributions and their growth are added on top. A tracing uses the plan statements from the date of marriage to the valuation date to separate the two. Without statements from around the date of marriage, the separate claim may be hard to prove.

Valuation date and market changes

The order should name a valuation date, such as the date of separation, the date of trial or the date of the decree. It should also say whether the awarded share is adjusted for gains and losses from the valuation date until the plan actually segregates the account. A fixed dollar amount without gains and losses can leave one spouse carrying all the market risk for months.

The QDRO

The plan cannot pay the other spouse without a QDRO that meets federal law and the plan's own rules. The order names the alternate payee, the amount or percentage, the valuation date and the treatment of gains, losses and loans. Most plans will review a draft before it is signed, which avoids a rejected order after the decree.

Loans, vesting and Roth money

• Loans: An outstanding 401(k) loan reduces the balance. The order should say whether the loan is counted before or after dividing the account and who repays it.
• Vesting: Unvested employer contributions may be forfeited if the employee leaves. The order can address whether the share is based on the vested balance only.
• Roth and pre-tax money: Roth 401(k) dollars are worth more after tax than pre-tax dollars. The order should divide each source proportionally unless the parties agree otherwise.

Taxes and the 10 percent penalty

A transfer under a QDRO is not a taxable event for either spouse. The receiving spouse can roll the money into their own IRA tax-deferred. If the receiving spouse instead takes cash directly from the plan under the QDRO, the 10 percent early withdrawal penalty does not apply, but the money is taxed as ordinary income and the plan withholds 20 percent for federal tax. That exception is lost once the money is rolled into an IRA.

IRAs are different

An IRA is not divided by a QDRO. It is divided by a transfer incident to divorce under the decree, sent directly from one IRA to the other. The penalty exception for QDRO distributions does not apply to IRAs.

Factors that typically matter

• Balance on the date of marriage and statements available to trace it
• Valuation date in the decree
• Whether the share is adjusted for gains and losses until the account is split
• Outstanding loans
• Vested vs. unvested employer contributions
• Mix of pre-tax and Roth money
• Whether the receiving spouse needs cash now or can roll the money over

Documents commonly reviewed

• Plan statements from the date of marriage through the present
• Most recent quarterly or annual statement
• Summary plan description and the plan's QDRO procedures
• Loan statements, if any
• Vesting schedule for employer contributions
• Any prior rollovers into or out of the plan

Common mistakes and misconceptions

• Treating the statement closest to the wedding date as the separate property amount without tracing growth.
• Awarding a fixed dollar amount with no adjustment for gains and losses, then waiting months to file the QDRO.
• Ignoring an outstanding loan when setting the split.
• Rolling the whole share into an IRA when cash is needed, which loses the penalty exception.
• Treating Roth and pre-tax dollars as equal in a trade for other assets.
• Using a QDRO for an IRA, or a transfer incident to divorce for a 401(k).

When a professional may be useful

A CDFA® is useful when there is a premarital balance to trace, when the account has a loan or a mix of Roth and pre-tax money, when the 401(k) is being traded against the house or a pension and after-tax values need to be compared, or when the receiving spouse needs cash and the withdrawal should be planned around taxes and the penalty exception.