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Property division is one key aspect of virtually every divorce.  This includes all types of property, from personal property like jewelry, to real estate to retirement accounts.  This blog is written to very generally address the issue of taxes with regards to division of 401(k) plans/accounts, if you have questions regarding your retirement assets and divorce or separation, please do not hesitate to contact us to schedule a consultation by clicking on this link or calling (248) 608-4123.

Are 401(k) Plans Or Accounts Divided In A Divorce?

The simple answer is yes, 401(k) plans are subject to equitable division in a divorce in the State of Michigan.  This means that regardless of which spouse may have saved the money in the account or which spouse is the participant in the plan, the account will be subject to division.  Typically the courts divide only the marital portion of the account, so if you had a balance in the account on the date you got married, then that balance will be your separate property and not subject to any division, only the increase in the account will be divided in a roughly equal manner.  If you did not contribute any funds to the account during the time you were married and the growth in the account is due only to simple appreciation, then typically that entire account will be considered your separate property and not subject to any division.  If both spouses have 401(k) accounts, typically those accounts are offset and then the spouse who has more in their 401(k) account(s) will make an equalizing transfer to the other spouse so that both will have an equal amount of marital 401(k) funds.

Are There Taxes To Pay When The 401(k) Is Divided Between The Spouses?

The short answer is no, when there is a division between the spouses incident to divorce, there are no tax consequences to either spouse so long as the funds from one spouse's 401(k) are rolled over into a new 401(ki) account in the other spouse's name.  The following is a simple example of how this works where both spouse's have 401(k) accounts.  Jim and Tracey are getting divorced and both have 401(k) accounts.  If Jim has $100,000 in a 401(k) account with Schwab and Tracey has $200,000 in a 401(k) account with Fidelity, then Jim will have to open a new 401(k) with Fidelity while Tracey fills out the correct form and provides a copy of the relevant court orders to the Fidelity plan administrator.  Once all of that is done and the plan administrator confirms that the proposed transfer qualifies, the administrator's office will transfer $50,000 out of Tracey's Fidelity 401(k) account into Jim's new Fidelity 401(k) account leaving both of them $150,000 in total marital 401(k) funds.  If Jim decides at some point that he does not want to keep his rollover 401(k) with Fidelity, he can change plans in the same manner as he would with any other 401(k) account.  

This does not mean that you can withdraw the funds from the 401(k) immediately upon divorce.  Any withdraws from the accounts would be subject to the same taxes and penalties as a withdraw from any 401(k) account.  These accounts are essentially treated the same as a "roll-over" 401(k) that you might have with a former employer.  If you withdraw funds before you are eligible, you will incur penalties and taxes.  Once you are eligible to withdraw funds penalty-free, you will still pay income taxes on the funds you withdraw..

If you have any questions regarding your own future and the possibility of divorce or separation, please contact us to schedule a consultation by clicking on this link or calling (248) 608-4123,