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Factoring 401(k)s in a divorce

On Behalf of | Apr 28, 2021 | Divorce

If you’re facing divorce, one of the main financial concerns you’ll have is how your marital assets will be divided between you and your former spouse. The answer to this question depends on the type of accounts you have to divide with your ex and the rules associated with these accounts. If you live in Virginia and are planning to divorce, here are some important things you should know about dividing 401(k)s.

Learning about your retirement account

Keep in mind that not all retirement accounts are alike. You need to know what type of account you’re dealing with before you can learn about the distribution process. Generally, retirement plans are defined benefit plans or defined contribution plans.

Defined contribution plans are retirement plans in which an employee, or an individual for an IRA, contributes a specific amount. The employer may match contributions up to a certain amount. The most common type of defined contribution plan is a 401(k). For this type of plan, an employer has a small percentage of their paycheck deducted, and the funds are transferred into the 401(k) account. In a divorce, the funds in the 401(k) are typically divided between two spouses, but a court will decide which percentages are fair for both parties.

Taxing rules for 401(k)s

The deductions for a 401(k) are pre-tax. This means that the funds come out of the employee’s gross income before taxes are withheld. The money is taxed once the employee retires since it is assumed that the employee will be in a lower tax bracket at retirement.

Defined contributions that are divided equally are distributed to each spouse through a transfer after the judgment of divorce has been entered in court. If one spouse has significant funds in a 401(k) account, once the divorce is final, the other spouse will receive a transfer of some of the funds. The money must go in a similar account to avoid taxes.

Depending on how many retirement accounts you have and what types they are, you may be unsure how to fairly divide them during divorce. Speaking with a family law attorney may help you understand more about properly dividing your financial assets.

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