How will the law of Equitable Distribution affect a 401(k)?
Dividing your shared assets in a divorce can be one of the more contentious parts of the process. It is common for couples divorcing to not agree with what is fair in any given situation. The bigger the asset in question, the likelier it is for the couple to strongly disagree about what is reasonable or fair.
Retirement accounts, in particular, can be a source of contention at the end of a marriage. When one spouse is the sole owner of the retirement account, they may believe they are the only person with a legal claim to it. They may feel like their spouse has no right to claim any of the funds in a retirement account that they never contributed to.
However, Pennsylvania’s family courts will not agree with that opinion unless you have a prenuptial agreement that designates your retirement account or pension as the sole or separate property of one spouse. That means you can anticipate a court order splitting your retirement account between you and your spouse.
Does splitting your retirement account now result in major penalties?
If you have invested in funding a 401(k) account for your retirement, you probably already know that there are substantial penalties imposed on anyone who withdraws retirement funds before a certain age. In addition to needing to pay taxes at the time of the withdrawal, you will also likely have to pay a penalty.
The purpose of these financial consequences is to deter people from dipping into retirement accounts to cover other expenses. Thankfully, those penalties and charges do not apply to the division of a 401(k) and/or pension in a divorce. If a retirement account is split, a Qualified Domestic Relations Order (QDRO) will be drafted and filed with the Court and then sent to the plan administrator. A QDRO instructs the plan administrator to deposit a particular percentage or amount of the account balance into a newly-created account in the name of the receiving spouse. Provided that everything complies with the terms of the QDRO, the standard penalties and fees associated with an early withdrawal from a 401(k)/pension will not apply.
Any amount accrued during marriage is subject to division
While only one spouse may have directly contributed to the account, that does not mean their spouse did not help through unpaid labor and support during the marriage. If it was acquired during the marriage, it will be considered marital property absent a pre- or post-nuptial agreement. Knowing that you will may need to share these funds or that you will receive these funds can help you make more informed decisions about both your divorce strategy and your retirement planning as you move forward.