When a couple gets divorced, they must divide their marital estate, which includes the money and property that the spouses acquired during their marriage. However, dividing complex assets like 401(k)s and other tax-advantaged retirement assets can prove more challenging in a Minnesota divorce. How do couples divide their 401(k)s and other retirement accounts in divorce?
Minnesota’s Property Division Laws
Minnesota divorce law follows the equitable distribution rule for dividing marital property. In equitable distribution, courts divide marital property fairly, although not necessarily in a 50/50 split. Instead, courts determine what a “just” division of property looks like for a couple based on various factors such as the length of the marriage, each spouse’s contribution to acquiring marital assets, and each spouse’s separate financial resources.
Marital property typically includes all assets acquired by spouses during their marriage. As a result, each spouse’s 401(k) may qualify as a marital asset if the spouses opened the accounts during their marriage. Alternatively, contributions each spouse makes to a 401(k) they opened before getting married may also qualify as marital property.
Marital vs. Non-Marital Portions of a 401(k)
In many cases, spouses may have 401(k) accounts they opened before getting married, meaning those accounts will have marital and non-marital portions. In a divorce, courts must divide the marital portion of the account, which can include contributions made by the spouse and the growth in the value of the account’s investments during the marriage. As a result, determining the marital and non-marital portions of a 401(k) may require couples to have detailed documentation and rely on accounting or financial experts to calculate the value of each portion of their accounts.
The Process of Dividing a 401(k)
Couples typically divide marital assets in 401(k) accounts through qualified domestic relations orders (QDRO). Unlike a traditional bank account, a spouse with a 401(k) cannot give a portion of their account to their spouse in a divorce without incurring substantial tax penalties. Instead, spouses can use a court-issued QDRO to divide a 401(k) or other tax-advantaged account. A QDRO directs the plan administrator of a 401(k) account to issue distributions from the account to the account holder’s ex.
A couple can divide a 401(k) through a QDRO by drafting a proposed order and having the plan administrator approve it. Obtaining the plan administrator’s pre-approval will ensure that they will implement the order. Each plan administrator may have different requirements for a QDRO, and laws such as ERISA may also impose specific requirements for QDROs. After obtaining the plan administrator’s pre-approval, couples can submit the QDRO to the court for the judge’s signature and approval.
Couples have other options for “dividing” a 401(k) that do not involve using a QDRO. For example, a couple may choose to offset a spouse’s share of the marital portion of a 401(k) with other marital assets during equitable distribution, such as real estate, vehicles, or cash or securities in different accounts.
Tax and Penalty Considerations
Dividing a 401(k) or other tax-advantaged retirement accounts will require couples to consider the tax implications of division. Withdrawing money from a 401(k) for a non-exempt purpose can trigger substantial tax penalties, significantly reducing the value of a 401(k) account. QDROs can help spouses avoid tax penalties when dividing 401(k) assets, either by facilitating the rollover of a spouse’s share of an ex’s account into the spouse’s retirement account or by directing distributions of the account to an ex-spouse when the account enters payment status.
Contact a Divorce Lawyer Today
If you and your spouse have tax-advantaged retirement accounts, you need experienced legal counsel to help you properly divide retirement assets that qualify as marital property in a divorce. Contact Jaspers, Moriarty & Wetherille, P.A., today for a confidential consultation with a divorce lawyer to discuss how you and your spouse can divide retirement accounts that qualify as marital assets in a divorce in Minnesota.