Honey, I Shrunk The 401K

divorce during retirement

When Lance and Cynthia Baldwin talked to their attorneys about a divorce after seven years of marriage, the first question each lawyer asked was not, “Who will get custody of the children,” it was “What will you do about the 401(k)?”

In a situation which occurs often but is not understood well, a lifetime of socking away money can be determined by what you signed years ago when beneficiaries were designated. If the document hasn’t been updated to reflect life changes, you may not be able to leave your 401(k) to the people you want. You could be gifting an economic nightmare instead.

With over $6 trillion in play in IRAs the dollars are huge. Add another $6 trillion in 401(k)s which may — or may not — go to the chosen recipient, or it could go to a former spouse.

Accidentally leaving a former spouse designed as the beneficiary of an existing 401(k) will give them the money from the fund — if other documents, such as a will, stipulate the assets are excluded from any divorce.

The amount of investment in a 401k which is accrued within a union is ordinarily considered ‘marital property.’ States like New York are Equitable Distribution states. This signifies the sum in the 401k will be divided into the lines of what is ‘fair and equitable.’

A possible issue is the funds may be removed by the depositor before, or during, the divorce. The plan’s sponsor would need to be contacted to see if they can flag the account to keep any receivables or withdrawals from happening without notification. If the masterplan allows for this maneuver, they should be able to do so.

Do You Want To Split The 401K?

Retirement accounts should be viewed in the totality of finances during divorce negotiations. Often persons experiencing stress and anxiety fail to look at the big picture and make decisions without proper research and seeking financial advice. You may not always want to divide retirement accounts especially if significant other bank tools are on the table.

Be sure to review all the short and long-term economic obligations and implications of any decisions. While there may be legitimate reasons to borrow money from a 401K, a divorce financial analyst should be consulted to see if it makes sense to do so before the divorce.

Many financial decisions have to be made during a divorce. Requiring convoluted math and an in-depth knowledge of tax and fiscal rules, a misstep can lead to significant long-term outcomes. With a qualified divorce financial planner working with you and your attorney, your economic future can be secured.

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