How can I safeguard my finances in the midst of divorce at the age of 55, with an $800k 401(k) account?

How can I safeguard my finances in the midst of divorce at the age of 55, with an 0k 401(k) account?

A couple going through a divorce.

Like all family and property law, divorce is a highly state-specific process. How you handle a divorce and protect your assets, as well as what constitutes individual or shared assets, will depend entirely on your jurisdiction. As a result, how retirement accounts are handled during divorce can vary greatly from state to state.

If you need financial advice during or after a divorce, consider connection with a fiduciary financial advisor Today.

The first step is usually to separate personal property from marital property. In most cases, you retain pre-marriage assets and debts and share assets and debts you acquired during your marriage. This is much more complicated than it seems, because it is very easy for assets to commingle and share the value accumulated during a marriage.

For example, let’s say you are 55 years old and have $800,000 in 401(k). The most important part will be where you live and how much of the account was earned during the marriage. From there, a divorce court will generally divide the 401(k) based on your overall household assets and, in particular, any other retirement accounts owned by you or your spouse.

While a full discussion of this issue is well beyond the scope of a single article, below we will explore some of the most important factors to consider.

Retirement accounts and divorce

Retirement accounts can play an important role in divorce proceedings. Retirement accounts can play an important role in divorce proceedings.

Retirement accounts can play an important role in divorce proceedings.

Divorce courts generally do not grant special status to a couple’s tax-advantaged retirement accounts. A judge will treat these portfolios like a standard financial asset, dividing each account based on the overall asset distribution, the relative financial circumstances of the parties, and the marital versus personal status of the account, among other factors.

There is no tax penalty for early withdrawals to transfer retirement assets between divorcing spouses. This is usually done via a “Qualified Domestic Relations Ordinancer” or one “Transfer the incident to divorce” depending on the nature of the account.

You can transfer these funds directly to another eligible pre-tax account without triggering income taxes or early withdrawal penalties.

For example, let’s say you have $800,000 in a 401(k), including $300,000 in the account when you got married. Typically, you will keep this $300,000. The remaining $500,000 could be considered marital property and divided between you and your spouse. You could then agree to split that money 50/50 and write a QDRO to remove $250,000 in assets from your 401(k) and move them to an account of your spouse’s choosing.

Retirement accounts can be distributed directly, with one spouse receiving the assets or their cash equivalent upon divorce. Assets can also be split in retirement, with each spouse receiving income or distributions according to the terms of their divorce. This is more common with a more structured retirement asset, such as a annuity or one Pensionwhich can be difficult to separate.

Whether you are starting divorce proceedings or have completed them, a Financial Advisorr can help you set and plan new financial goals given this major change in your life.

Community versus states of equity

States have two primary ways of handling divorce-related property: community or equitable.

Community property has become increasingly disadvantaged, such that relatively few states (nine in total) still practice it. Under this system, a court will order marital property to be divided equally between spouses in the event of divorce, with each spouse taking half. Here, for example, under a community property plan, a court would simply give each spouse 50% of the marital component of the 401(k).

Equity, or “equitable distribution“, is increasingly the standard model. Under this approach, courts will attempt to divide divorce assets fairly, not necessarily equally. The court will consider several factors, including (but not limited to limit) length of marriage, child care arrangements, work and career, financial and personal contributions to the marriage, potential earnings and, in some cases, faults and bad deeds.

In the case of a retirement fund, a court might also consider issues such as the age of the spouses (who have more time to save), the future Social Security each spouse’s benefits and other retirement assets held by each spouse. For example, if you are 55 and your spouse is 45, the court might give you a larger share of the 401(k) assets because you have less time until retirement. On the other hand, if you have $800,000 in your 401(k) and your spouse has $750,000 in theirs, a court could transfer few (if any) assets between two parties in a similar situation. similar.

Whether you live in a community of property or in an equitable distribution state, a Financial Advisor can help you consolidate the assets you receive in a divorce and build a comprehensive financial plan around them.

Protecting your assets and tax status

Divorce can be a financially and emotionally stressful process. Divorce can be a financially and emotionally stressful process.

Divorce can be a financially and emotionally stressful process.

The truth is that there are few legitimate ways to protect your marital assets from divorce proceedings. Much advice on this subject has a tinge of illegality, as attempting to hide your assets or obscure your marital history can constitute fraud. As a result, most advice about moving your assets or changing their tax status is useless at best and legally suspect at worst.

Some advice recommends stopping contributions to a 401(k) during divorce proceedings. Although this will (modestly) reduce your spouse’s earnings, it will equivalently reduce your own earnings and will not change the underlying cash distribution.

While a Financial Advisor can be a valuable resource during a divorce, there are a few basic steps you can follow:

1. Create your own bank accounts

First, once the divorce begins, establish your own Bank accounts. Cash flow will be critical. You’ll need to pay legal fees, start your own household, start building a separate credit history, and much more. You may also want to buy out your spouse’s share of the retirement portfolio. For example, let’s say you have an $800,000 401(k) based on stock options from your employer. You may want to keep these assets invested. In this case, you may want to accumulate cash so that you can pay your spouse the equivalent value for their share of the 401(k), exchanging the cash for the higher-value portfolio assets.

Although your spouse may choose to decline your offer if they also prefer long-term valuable assets.

2. Stop your spouse from cashing out 401(k)

You will also want to speak with your divorce attorney and 401(k) plan administrator immediately. It is not uncommon during divorce proceedings for spouses to attempt to sell, move or spend their assets. In some cases, it is an attempt to disrupt the proceedings, for example by converting identifiable titles into obscure personal property. In other cases, it is simply an attempt to destroy or devalue shared property out of malice.

Whatever the goal, you want to address this issue from the start. It’s much easier to stop your spouse from cashing out the 401(k) than to try to get that money back.

3. Collect and create explicit records

You want to know exactly what you own and where. Clearly document all financial transactions you make and pay attention to those made by your spouse. These documents include address to beneficiaries of all policies, such as your 401(k) and life insurance. You don’t want your spouse to retain authority or rights over these accounts, regardless of how they are divided.

4. Pay attention to the tax status of assets

Finally, pay attention to the tax status of your settled assets. For example, let’s say you have an $800,000 Roth IRA in addition to your $800,000 401(k). Do not agree to a divorce settlement that treats these assets as assets of equal value, because the Roth account is likely much more valuable than the other. Make sure that you and your attorney insist on treating your 401(k) as the before tax it is an asset, not the $800,000 asset it appears to be.


Protecting your assets during a divorce is difficult because under the law, they are not your property. They also belong to your spouse. But you can put yourself in a better position by remembering to track your money and evaluate it for its long-term after-tax value.

Financial advice in case of divorce

  • Divorce is stressful and painful, especially since it involves some of the most complex financial transactions a household can make. While it is important to have legal and financial professionals to help you through the process, you also need to understand exactly what’s in it.

  • Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

Photo credit: © Wackerhausen, ©, ©

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