As many of you know. I’m currently going through a divorce.
Go me.
It’s amicable so we’re sorting through things okay. But one of the issues that has come up that neither of us have any clue what to do with is how to divy up the 401K plan. It’s in my name from my work. My feeling is that she should be entitled to a percentage of what I earned while we were married, but she seems to think that she should be allowed a percentage of it from now until the time I retire.
Has anyone else dealt with this before? Is there some standard formula for figuring out how much of past and future contributions to the plan each of us should be entitled to? Help me out here.
Your 401(k) currently has some well-defined value. (You’ll have to ask a lawyer what that value is.) Your ex-wife is entitled to a fraction of the value right now, in some form or another. It could be cash. I don’t think you have to keep it invested and then give her the amount plus whatever interest accrued at some future date.
My wife’s parents recently divorced and the 401(k) was settled up during the divorce proceedings, not at a later date.
I agree with you, Euty. Future earnings should be considered in the same vein as things you acquire after the split (which she’s not entitled to). I’d agree on a fair amount and cut her a check, and make sure you address the (settled) issue in the final dissolution papers.
During my divorce, me ex made veiled threats about going after my pension. We’d been married for six years, five of which I was in the Navy. After lots of research and talking to my lawyer, I learned she was entitled to an equitable percentage of it (sure enough, about 20%) should she fight for it. I made a generous offer in splitting a money market account with her, and she took it. I had the pension spelled out in the final decree as being part of my future earnings and thus not an entitlement.
When I went through my amicable divorce, we put down all the assets on paper and divied 'em up equally. He had a 401K, most of it earned while we were together. It ended up going to him, and I got an equal amount of other assets to balance it out. That seemed a lot easier than trying to figure out how to split the 401K in half.
If the (soon to be former) missus, wants the tax-free growth benefit of an IRA, you should get what’s called a Qualified Domestic Relation Order (QDRO) That goes along with the decree of dissolution of marriage, and tells the IRS and the custodian of the account to give her a certain percentage (eg. 1/3) to rollover into her own IRA account. She would be able to contribute further to it and have it grow tax free until she removes it.
The other option is to give her a check equal to the value of the 1/3 interest in your 401k. You get to keep your tax free growth but must write a check now. She gets cash now, but any income from that cash is subject to income tax. Under no circumstances should you simply withdraw a portion of the 401k to give to her, as that would trigger recognition of income. Try and avoid taking a loan against it too.
Which option you take, depends on your and her circumstances. She’s definitely not entitled to a cut of your future contributions to your 401k account.
If you’re paying maintenance/child support, it behooves you to pay it in the form of X dollars of “unallocated maintenance and support” rather than 1/2 X in maintenance and 1/2 X in child support. Maintenance is deductible from your income taxes, and includable in hers, while child support is not. Unallocated means the whole shebang is deductible to you. This (perhaps sexistly) assumes that you will be paying something to her and that you will make more money than she is. You can agree with her to have a portion of it as taxable to you and a portion taxable to her in any combination, so long as the IRS gets to tax it all somewhere.
Here in GA, my ex-wife was not entitled to any of my 401k or any of my other stock accounts because she took no part in managing them and did not contribute to their growth in any way.
GA uses a “source of funds” rule. The way my lawyer explained it to me, a spouse is only entitled to a portion of funds in which they can show that they contributed to its’ growth in some way.
Of course, my divorce wasn’t amicable so this may not be any help to you.
My ex-wife and I went the QDRO route. I got a piece of her 401K, she got a piece of my 401K.
Your attorney should really be giving you advice on how to handle this - I made mine work his ass off. I figured, I’m paying your tab, you work for me.
I have a bad feeling I’m thinking too much about this.
Is your wife trying to make any claims based on your future earnings? I haven’t seen all of your threads about your divorce so I don’t know if this is even remotely relevant to you…but here’s how it might work. Typical narrative: wife supports husband while he’s in school. His degree provides him with a much increased income. In New York, and in some other states, if wife and husband later diveorce, wife may assert a form of ownership over the husband’s degree. This may mean that wife gets to claim future earnings.
Now, it’s a whole lot simpler for the wife just to claim cash, rather than try to grab future contributions to a 401(k). But stranger things have happened. And if your situation looks anything like what I’ve described, it may be worth a two-minute question to your lawyer.