If you are moving toward a divorce, you are no doubt concerned about your financial future, including how your marital property will be divided between the two of you. While some of this division of property is fairly straightforward, many people are confused about what happens to their 401(k) plans in a California divorce.
Your retirement plan is typically one of the most valuable assets you own. However, if you get divorced from your spouse, you might have to divide your 401(k) equally during asset division. It will depend on when you acquired your retirement plan, and your spouse could receive up to half of the value you acquired during marriage.
This can be a complicated issue that is best addressed by an experienced California divorce attorney, but there are some standard rules that generally apply and that it's helpful to familiarize yourself with. Let's review below.
California Rules on Dividing Marital Assets
Your retirement plan will often be one of the most significant assets to divide during your divorce. California functions on a community property basis, meaning you have to divide your retirement plan, employee benefits, and assets you acquired during the marriage by 1/2 with your spouse.
This provides your spouse with 50% of your retirement plan's value you acquired during the course of your marriage.
Any type of retirement plan is subjected this regulation, including employment plans, family-owned plans, and conventional private plans. It's important to note that your spouse is only entitled to claim the amount you accrued during the marriage.
For example, if you worked 120 months under your 401(k) and you were married for 60 months, your spouse can claim 50% of the value of the retirement acquired while married.
Rules for Dividing 401(k) Plans in a California Divorce
As stated, in the State of California, any assets that you acquire in the course of your marriage, including 401(k)s and other pension plans are divided equally in the event of divorce.
This means that both of you are entitled to half of your 401(k) plan (and vice versa). It's important to recognize, however, that this only applies to that portion of the 401(k) that you accrued while you were married. If you came into the marriage with value in your pension plan, that portion is separate property that belongs to you alone.
Another example, if your plan represents 25 years of work and you were married for 20 of those years, your divorcing spouse is entitled to half of the value that you accrued in the last 20 years – but not to any of the value that you accrued in your first 5 years of work.
Options for Dividing Your 401(k) Retirement Plan in California Divorce
While your spouse is likely entitled to half of your 401(k) or other retirement plan in your divorce, actually dividing the plan can be difficult.
If you aren't retiring or haven't already retired at the time of your divorce, decisions will have to be made – usually via negotiations between you and your spouse through your respective family law attorneys. There are a variety of approaches that you can take:
- You and your divorcing spouse can agree that each of you will receive your payouts from the 401(k) when you, the participant, cashes it in.
- You can both agree that you will be assigned the entire value of your plan and that your soon-to-be ex will be compensated with another asset from your community property.
- You can split your retirement assets by implementing a Qualified Domestic Relations Order (Form FL-460), which will allow you, the 401(k) participant, to roll assets into a qualified plan owned by your spouse. This is tax-free and does not generate penalties.
Whichever route you and your spouse determine is best for you, it is critical to carefully consider current and future tax implications and to weigh each path against the others to ensure that you maximize your plan's overall value.
Making Withdrawals Prior to Divorce
If you know your marriage is headed toward divorce, it can be tempting to attempt to protect your retirement savings ahead of time by making early withdrawals.
This is not, however, how the law works, and such withdrawals are likely to be treated by the court as advance payments on your share of community property. Further, you might be hit with financial penalties that can cut deeply into the amount you are ultimately awarded.
Conversely, if you dip into your 401(k) because of financial hardship prior to your divorce, the court may not require you to reimburse your spouse.
For example, if you withdraw funds from your plan in order to reduce your overall marital debt or to keep marital property from repossession, these withdrawals serve both you and your spouse's financial interests, and the court will unlikely penalize you financially for these premature withdrawals.
Your Assets
The assets you and your spouse have accrued over the course of your marriage are likely to be exceedingly complicated. For example, it is not uncommon for separate property to become comingled. Further, if you both have financial portfolios that you accrued during the course of your marriage, carefully calibrated forensic accounting is probably going to be necessary. The fact is that your financial future likely hinges on your divorce settlement, and it is, therefore, important to get it right.
Los Angeles Divorce and Family Law Attorneys
If you have concerns about the division of your community property and avoiding mistakes dividing up 401(k) assets, you should work closely with an experienced Los Angeles divorce lawyer. You have worked hard throughout your career, and your retirement is an important financial symbol of that work that you naturally want to protect.
Our dedicated divorce and family law attorneys at faithfully serve the clients throughout Southern California, including the greater Los Angeles area, Ventura County, and the San Fernando Valley. We're here to help ensure that your divorce case comes to its most beneficial resolution. To schedule a free consultation, please contact or call us at 818-528-3471.
Furman & Zavatsky
15821 Ventura Blvd #690
Encino, CA 91436
818-528-3471