You probably have a lot of emotions you're trying to process while going through a divorce, and unfortunately, that's not all. You also have to untangle your finances -- a process that is rarely short and often difficult. This includes deciding what happens to your retirement savings.
Even if you're parting on good terms, you may not want your ex walking away with your 401(k). But this can happen for a couple of reasons. Understanding them and what you can do about them is key to keeping control of your hard-earned savings.
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1. Qualified Domestic Relations Order (QDRO)
A Qualified Domestic Relations Order (QDRO) is a court order that requires you to transfer a portion of your retirement savings to an account in your soon-to-be ex's name. This sort of transfer doesn't trigger any tax liability in the current year, but it can set your retirement plans back a bit.
Fortunately, you're not likely to lose all your savings, and you may not lose any. In many states, money you put into your 401(k) before your marriage is not considered marital property, so your ex won't be eligible to claim any of it.
What happens to 401(k) funds saved during the marriage depends in part on the rules of your state. Your divorce lawyer should be able to explain this to you.
Sometimes, if the divorce agreement requires you to pay your ex something, you can hold on to your 401(k) funds by offering them something else of equal value, such as a house. But it'll be up to you and your ex to come to an agreement that works for both of you.
2. Outdated 401(k) beneficiaries
Your 401(k) beneficiaries are the people you want to inherit your 401(k) after you pass away. When you were married, you probably had your spouse listed as the primary beneficiary. This makes sense. But it may not be what you want anymore.
Check with your 401(k) plan administrator to update this, if you haven't already. In addition to the primary beneficiary, you'll also be able to elect contingent beneficiaries. These are the people who will inherit your 401(k) if the primary beneficiary predeceases you or if they decide they don't want the money.
If you have any other questions about how your divorce could affect your 401(k), ask your divorce lawyer first. They may be able to help you or point you in the direction of someone who can give you more personalized advice.
