# 401K - basic questions as it relates to divorce



## TheSearchForTruth (Sep 27, 2013)

So I have a pretty sizable 401K ($225,000) all of which has been accumulated during my 8 year marriage. Maybe a few hundred was in there prior to the marriage, but not worth even trying to figure that out.

So my wife and I separated on Oct 1st, and we are almost done with our separation agreement - that states splitting the account as of the Oct 1st separation date.

1) Legally, is it appropriate to split the balance on the date of separation? Or can my wife come after a higher balance if it goes up between now and our actual divorce in 9 months?

2) Should I sell half of the account now and put it into cash... so that I don't have to carry the risk of that going down between now and the divorce date. (specifically, would I be screwed in the unlikely event that the market dropped 50% between now and next fall... and have to hand over the entire remaining account to her because the separation agreement says half of this years Oct 1st balance?)

What are the protections against market fluctuations between now and the divorce... also what happens to my contributions during the separation? I'm interested in increasing my contributions significantly, but I will wait until after the divorce, if that is smarter.

I'm sure others here have been through this. Not looking to waste another $320 asking my lawyer these questions (though I guess with that much money on the line, I'll probably do that anyway). Lets just say I'm impatient to know the answer and Google search didn't come up with much. haha

Thanks in advance.


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## Why Not Be Happy? (Apr 16, 2010)

ask your lawyer, accountant and financial adviser.


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## Married but Happy (Aug 13, 2013)

There are no simple answers, other than to specify it in the separation agreement. Normally, I think it would be half the value as of the divorce date, subject to whatever market fluctuations and contributions you make until then. You don't even have to contribute - unless that's in the agreement. This is a large pot of money - it's worth paying your lawyer to nail it down clearly and finally.


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## Pluto2 (Aug 17, 2011)

Definitely ask your attorney, but most states use the date of separation as the valuation date for marital assets. The actual date of distribution of the asset would be when the court signs the QDRO. In my case, the 401K went up considerably in the last year, to the point that it almost made up the amount I had to pay the ex. I'm not sure that would have happened if I had sold the account.


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## honcho (Oct 5, 2013)

Cashing out the account is a poor move because of the tax implications and early withdrawal penalties. States vary as to the actual value date, some being separation date, others final divorce date. 

The attorneys can also agree upon a date and the court will generally go along with that. Whatever the date is, it then gets split, if the market tanks or if it goes sky high it doesn't matter. You also need to be careful with contributions during the separation, generally that is still martial property but if both parties can agree then those contributions can be 100% assigned to one person or the other.


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## Thor (Oct 31, 2011)

There are severe tax implications for cashing out of a 401K. When you do the calculations for the valuation be sure to include the tax costs.

In the meantime you could contribute to a different account. There are other retirement vehicles such as a Roth IRA which you could put money into. It might make the math easier.

Trying to guess what the market will do is tricky. I think you would be better off actively managing your account rather than putting half in cash right now. I would follow the trends and keep the investments in good mutual funds or index funds which are performing well. If you can, use Stop-Loss sell orders for protection. As an example, if your tech fund drops, you are protected from loss there, but your energy fund is still gaining. This way you get the benefit of keeping your money invested while limiting your losses. If you can evaluate your investments every 2 or 3 months you can probably do a lot better than going to half cash now.

I would push to get the valuation set at the date of separation. In fact, I would push for all financials to be locked in at that date, barring any monumental changes between now and the finalized settlement (she wins the lottery, you lose your job, etc).


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## In_The_Wind (Feb 17, 2012)

honcho said:


> Cashing out the account is a poor move because of the tax implications and early withdrawal penalties. States vary as to the actual value date, some being separation date, others final divorce date.
> 
> The attorneys can also agree upon a date and the court will generally go along with that. Whatever the date is, it then gets split, if the market tanks or if it goes sky high it doesn't matter. You also need to be careful with contributions during the separation, generally that is still martial property but if both parties can agree then those contributions can be 100% assigned to one person or the other.


Actually he would not need to cash the entire account out but he could move the assets to a money market account still under the 401 k umbrella this would protect the Oct 1 valuation and insure against downward market spikes. it is the conservative thing to do in my opinion however in doing this he would not take advantage if the market rises. I used to work at Fidelity Investments as a retirement specialist and would see these types of things all time. the market will do one of 3 things between now and the time of distribution go up stay the same or go down


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## Morgiana (Oct 18, 2011)

The correct answer is talk to your lawyer. Definately do not convert it to cash outside of the retirement umbrella unless instructed to do so.


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## papa5280 (Oct 12, 2011)

Morgiana said:


> The correct answer is talk to your lawyer. Definately do not convert it to cash outside of the retirement umbrella unless instructed to do so.


:iagree:

Although a lawyer's advice might seem expensive, at a few hundred dollars, the mistake you are looking at by cashing-in part of the 401k could well be 40% or more of the value of that asset. I had a QDRO to split my 401k. It cost about $500, which was split between my ex and me. It involved a little paper-work, but at the end of the day, the assets were transferred to her under a new 401k in her name, with no tax impacts.

Well worth the cost of the professional services.


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## TheSearchForTruth (Sep 27, 2013)

Sorry for the confusion. Just to clarify, when I said move to Cash I meant keep in the 401k account but move half of the funds to Vanguards less risky cash equivalents. Or even bonds. This is to protect against downward trends if we keep the separation date as the splitting time.

Looks like they account has grown $25,000 since the separation date. It could have just as easily dropped $25,000...

Meaning if we keep the splitting of assets as Oct 1st of this year (like it looks like we are) I'm double leveraged on the gains and loses moving forward. Putting half of it into safer investments removes that risk.


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## papa5280 (Oct 12, 2011)

Ah...makes sense. I agree that if you have a separation agreement that specifies the amount she gets based on the 10/1 value, it makes sense to put that portion into cash equivalents. 

But, in my QDRO, they took the proportional amount out of each asset within the 401k. I don't know if all QDROs work that way, but if so, there still would be risk (and upside) to the half that you are keeping in the Vanguard funds.


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## Pbartender (Dec 6, 2012)

Okay.

Most important: If you do anything without a QDRO and without a valid Dissolution of Marriage, you will be subject to all penalties and fees pertaining to whatever action you are taking with your account.

That said, when you split a retirement fund during a divorce, there's a couple of options...

First, nothing can be done to the funds that stay with the spouse that owns the retirement account.

The part that goes to the recipient can be handled in several ways. It can be split off and remain as a retirement account of the same type, but in the recipient's name. It can be rolled over into an IRA or similar account. Those options are tax free.

Alternatively, the recipient can take a cash payout. The payout is subject to taxes and gets reported as income the next year's income tax. It is, however, a special case and is exempt from the early withdrawal penalty.

Also understand that the QDRO can be as specific on the terms and instructions of how the funds are handled as you like... So, yes, papa, you can specify different amounts and proportions to be withdrawn from different assets and accounts.

Those are your basic options.

As the others have said, though, consult a financial adviser. They will give you the best advice on this. You may consider consulting a lawyer, but only if they are specialized and experienced with QDROs. Also, give your employer's benefits department and you retirement fund company a call... There may be special rules for your employer or your retirement company on how they handle this situation and what they will allow.


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