While divorce can be a trying time emotionally, the legal aspects of a divorce are largely financial. How can a court separate out all the assets that a couple has acquired during their marriage? Or, if you’re negotiating a pre-court settlement, how can you and your spouse make those divisions?

Different states have different rules for how assets, including 401ks and other retirement accounts, are divided in a divorce.

Your (or your spouse’s) retirement account will also have rules about how it can be distributed or divided. It can all get fairly complicated, so it’s good to start thinking about it early in the divorce process.

Your 401k is marital property

My clients are often surprised by this, so I want to put it out there right up front. Even though your 401k is in your name, it’s marital property.

Why? Because it’s an asset you acquired while you were married. And in Georgia, that’s considered marital property whether it’s in your name or your spouse’s name.

The one caveat here is that if you started your retirement account before you were married, the portion of the account you earned prior to the marriage is not a marital asset.

How assets are divided

In Georgia, divorce courts attempt to divide marital property fairly. But what the court considers fair isn’t necessarily the same as what you consider fair. In the court’s eyes, fair is usually pretty close to equal. They may not split things exactly 50/50, but that’s often close to how it turns out.

Of course, it’s important to remember one critical fact. How a court divides assets only matters if the court is, in fact, deciding the terms of your divorce.

You and your spouse are free to come to an agreement you both think is fair on your own. You could decide to split everything 50/50. You could decide to trade the retirement accounts for the house. You could calculate every penny each of you ever contributed and divide it based on percentages. (Though that last option is exhausting, and we don’t recommend it.) The point is this: you can divide things any way you want if you have an out-of-court settlement.

You’ll have to submit your final settlement agreement to the court for approval. In general, the court will approve it unless they think it’s not in the best interest of any children.

So it’s really your ballgame, and you have several options.

See: What is an Uncontested Divorce?

Options for dividing retirement accounts

If you and your spouse are trying to reach an agreement about how to divide a 401k or another retirement account, you have two main options.

Provide assets of comparable value

The easiest way to divide a 401k is not to divide it at all. Instead of splitting the 401k, share other assets of comparable value.

For instance, say Spouse A has a retirement account with $250,000. To make it simple, we’ll say they didn’t start the account until after they were married. It’s all marital property.

Spouse A and Spouse B are trying to reach a settlement agreement, and they want to separate things evenly. So Spouse B could give Spouse A $125,000 of the 401k.

But Spouse B also wants to stay in their family home, which has $250,000 in equity. If they split that evenly, Spouse B would need to buy out Spouse A’s $125,000 share of that equity.

Instead, Spouse A could keep their retirement account intact. And Spouse B could keep the full equity of the family home.

Split the 401k with a QDRO

You may not have the right mix of assets to do an equal exchange with the 401k. Or you might just want to split it in half.

In that case, you need a QDRO. That’s a Qualified Domestic Relations Order, signed by the court. It tells the retirement plan administrator that someone other than the owner of the plan can receive all or part of the plan. The most common solution is for the 401k plan to be split into two accounts.

Your QDRO has to comply with any terms of the retirement plan. A plan administrator can reject a QDRO that doesn’t comply with the plan. That obviously creates delays and hassles that no one wants during their divorce. Most divorce attorneys do not handle QDROs, so you should plan on hiring specialized QDRO counsel. Note: Some retirement accounts, such as IRAs, can be divided without a QDRO.

Once the retirement account is divided by QDRO, the receiving spouse has a few options. They can keep their portion of the account as it is. They can do a penalty-free cash withdrawal of all or part of their portion of the retirement account. (They will stay have to pay taxes on this withdrawal.) Or they can roll it over into an IRA.

See: 7 Divorce Mediation Tips for Couples Ready to Move On

When you don’t want to split the 401k with a QDRO

There are some situations where it doesn’t make sense to split your retirement account with a QDRO.

  • If other assets are more important and you want to keep that in exchange for the value of the retirement asset. For many divorcing couples, this is the marital home. Ideally, both people would walk away with enough money to comfortably plan for retirement, but that isn’t everyone’s primary goal.
  • If both of you have retirement accounts that are similar in size. You may each decide to keep your own, especially because the cost of a QDRO may not be worthwhile. Couples who need to balance a small difference between the two accounts are often able to use cash available in other accounts rather than messing with their 401k.
  • If neither party has much money in their retirement account. If we’re talking about a couple thousand dollars, it probably doesn’t make sense to pay for a QDRO.

See: Amicable Divorce: How to Keep Things Peaceful When You’re Ending a Marriage

However you decide to divide your retirement account(s), you want to start with a clear understanding of what you have and what your plan allows. Ask your plan administrator for the plan guidelines. Find out if they have QDRO templates that satisfy their requirements.

Provide retirement account information to your attorney as soon as possible, and don’t leave it to the end of negotiations.

At Porchlight, we help divorcing couples think outside the box to develop financial solutions that work for both of them. Contact us today for a Divorce Strategy Session..