One major issue that comes up in a divorce when dividing assets is what to do with the 401k plan. One party often questions why the account should even be divided when the account has been maintained by that person’s employer.
California is a community property state, which means all income during the marriage is presumed to be community property. So, income that both parties deferred to a retirement account while they were married is still community property.
There are some cases where the retirement account was created before the marriage. There will still need to be some apportionment calculations since there is likely some component of the 401K that is still considered community property.
Dividing a 401k using the Collaborative Divorce Process
Dividing a 401k must be done carefully. Money can be lost depending on the age of the divorcing couple. If you take money from the account before the age of 59-and-½ the funds will be taxed by the IRS and California. In addition, there will be a federal withdrawal penalty of 10 percent and a state penalty of two percent. This behooves the couple to be creative in the ways they divide the fund.
In a Collaborative Divorce, the couple can make their own financial settlement without court intervention. This gives them leeway in creating creative ways to divide the funds. In traditional litigation, the court has rules it must follow in dividing the funds. The couple does not have to follow these rules when dividing property under the Collaborative Divorce process.
During the Collaborative Divorce, a neutral financial professional can help with creating a fair settlement without disrupting the 401k. This may be done, for example, by one person giving up their equity in the 401k in exchange for an increased share of the equity in real estate.
At Heberger & Company, An Accountancy Corporation, we assist those who are going through the Collaborative Divorce process or divorcing through traditional litigation. We can advise you of the best way to divide your 401k so that any financial loss is avoided or is minimized. Contact us online or at 559-227-9772 to schedule a free consultation.