What Happens in a Divorce When Both Own a 401(k)?

By Terry White

Updated April 01, 2020

Couple with lawyer

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One of the most complex decisions a divorcing couple faces is how to divide retirement savings accumulated during marriage. In addition to the marital home, retirement plans are often the most significant asset spouses have. Just like other marital property, a 401(k) can be divided in a divorce, but it usually requires complicated paperwork and tax smarts. When both spouses have their own retirement plans, division can sometimes be easier.

The Easy Path

When each spouse has a 401(k), personalities and account balances are often the driving factors when splitting retirement assets. By far, the easiest solution is for each spouse to keep his or her own account. Many couples are satisfied to avoid the complicated paperwork associated with dividing a retirement fund. This solution is workable only when the retirement accounts have near-equal value and the relationship between the divorcing spouses is somewhat friendly.

Middle-of-the-Road Solution

When both spouses have 401(k) accounts, the balance of one is sometimes significantly greater than the other. Perhaps one spouse stayed home with children during the early part of the marriage then rejoined the workforce, or perhaps one spouse earns a great deal more; thus, was able to save more into her retirement plan. In such cases, the spouse with the smaller account may opt for taking a slice of the other spouse’s retirement money or accept another marital asset of equal value to avoid the headache of dividing the retirement account. But it's not always easy to tell what "equal value" means. A $100,000 bank account is not necessarily equal to a $100,000 retirement account -- you have to consider the asset's liquidity, tax implications and future value.

Raising the Stakes

When spouses can’t agree on a division of 401(k) assets, the court must decide. If the court requires spouses to split a 401(k), the judge will sign a qualified domestic relations order. The QDRO directs the retirement plan administrator to pay the non-employee spouse part of the account. A QDRO allows the funds to be moved without tax or early-withdrawal penalties to either party. Each state, employer and plan administrator may have its own QDRO rules. Generally, a QDRO must spell out a specific formula to divide the assets. If it’s vague or doesn’t meet guidelines, the administrator may reject it.

The Hard Way

Because of the tedious paperwork, a QDRO is the most difficult way to divvy a 401(k) at divorce. Usually, a QDRO moves money from the owning spouse’s 401(k) to the other spouse's individual retirement account, where it remains tax-deferred. A spouse could also receive the funds directly without being subject to the early withdrawal penalty. Cash-out options, though, result in taxable income. Generally, a QDRO cannot cover more than one retirement plan or employer. Therefore, a spouse needs a separate QDRO for each retirement account and each employer, creating a complicated paper trail.