How are 401(k)s Divided in Divorce?
Nothing about divorce is easy, least of all dividing up financial assets. A 401(k) is a long-term investment that takes years and years to build up. The thought of losing that money is enough to create considerable stress in even the most amicable of divorces.
The best way to navigate the financial un-entanglement is with an experienced attorney. The lawyers of Kessler & Solomiany, LLC have years of experience helping folks in the Atlanta community through their divorces, and we’re prepared to help you, too.
What Is a 401(k)?
A 401(k) is a retirement savings investment plan that is offered by most American companies. In companies where this benefit is offered, employees can designate a percentage of their paycheck to be directly contributed to their 401(k) plan. Most companies will offer to ‘match’ their employees’ contribution up to a certain value, or sometimes for the full amount of their employees’ contribution.
There are limits set by the Internal Revenue Service (IRS) on the amount employees may contribute to their 401(k) every year. As of 2020-2021, the maximum amount an employee under 50 can contribute is $19,500 per year. Employees over 50 can contribute up to $26,000 per year. Importantly, these values do not include employer contributions. With employer contributions, employees under 50 can contribute up to a total of $58,000 per year, and employees over 50 can contribute up to $64,500 per year.
Traditional 401(k)s Versus Roth 401(k)s
While most employers offer traditional 401(k)s, Roth 401(k)s are a bit less common. Traditional 401(k) employee contributions are pre-tax. That means that the money is taken from an employee’s gross paycheck — the paycheck value before it is taxed. No tax is paid on the 401(k) until it is withdrawn. Upon withdrawal, both the contributions and the gains will be taxed.
Employees must be at least 59.5 years old or meet other requirements designated by the IRS if they wish to withdraw from their 401(k) account. Hardship withdrawals can be made to cover medical or burial expenses or to keep your home from being foreclosed upon. If an employee wants to withdraw from their traditional 401(k) account before they meet said hardship requirements, they pay a 10% early distribution penalty in addition to taxes on the contribution and earnings they owe.
On the other hand, Roth IRA contributions are taken out of an employee’s after-tax income. Unlike with a traditional 401(k), an employee with a Roth 401(k) does not have to pay any taxes on their contributions or earnings upon withdrawal, as long as they fulfill the requirements set out by the IRS. Those requirements include having the Roth account open at least five years and that the distribution is made after you’re 59.5 years old or because you’re disabled.
Are 401(k)s Considered Marital Property?
As you can plainly see, that money adds up. Most everyone would want to hang onto their hard-earned retirement funds in the case of divorce. Importantly, no money contributed to a 401(k) before marriage is marital property — that value is still individual property and will be yours upon divorce. However, all money contributed to a 401(k) during the course of a marriage is considered marital property. That means it is subject to division according to Georgia law. And Georgia, like most states, divides marital property 50/50. This means that the money accruing interest and waiting in your 401(k) plan will be split down the middle, and half will be given to your ex-partner. The only exception to this rule is if a valid prenuptial agreement was drawn up that addresses the division of retirement account assets.
When the money residing in the 401(k) is divided, a QDRO is drawn up. A QDRO or Qualified Domestic Relations Order is a court order that reassigns a portion of the retirement funds to the former spouse. This is how the funds are legally transferred and how a record is made of the split in the divorce proceedings.
How Kessler & Solomiany, LLC Can Help
Divorce is complicated. On top of the emotional stress, you are going to be wading through paperwork, dividing furniture, boxing up clothes, and filling your days with appointments. Hiring a lawyer can take the pressure off you.
You can trust the experienced divorce attorneys of Kessler & Solomiany, LLC. We have years of experience helping folks just like you through their divorces. We are here to help you answer even the most complex questions concerning your assets and get you on to the next step in your life. Give us a call today at (404) 688-8810.
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