- States divide marital property, including 401K plans, under the laws of either community property (a small minority) or equitable distribution (the vast majority). The major difference is that community property states divide marital property and debt equally, while equitable distribution states divide it equitably, which is supposed to mean "fairly." "Fair" and "equal" are not always the same concepts. Also, a few states will require a division of each asset, whereas most others will permit a court to base a division on the net value of the estate and distribute assets intact wherever possible.
- One factor that unites all the states is that their divorce courts seek to divide marital property, not separate property. Although the specifics vary, marital property generally consists of property acquired or earned during the marriage, with the exceptions of gifts and inheritances. Because you may have had your 401k before marriage and contributed to it after your marital estate stopped accruing, your plan may be at least partially separate. As such, while your ex may be entitled to half of all your marital assets, this doesn't necessarily mean that he or she gets half of your 401k.
- To divide a 401k, the plan will require a qualified domestic relations order (QDRO) to achieve a tax-free rollover from your account to your ex's, or vice versa. While QDROs can take time to prepare and may cost you money in terms of attorney fees, they are more than justified by the amount of money you save in early withdrawal penalties and taxes. If you simply withdraw the other party's entitlement from the account and write him or her a check, not only will you pay taxes and penalties on the withdrawal, but you may wind up owing more taxes on the other income you earned throughout the year, as well.
- While your ex may be technically entitled to half of your 401k, your plan won't necessarily be divided equally. If you're in an equitable distribution state and are eligible for an unequal distribution in your favor, for example, leaving your 401k intact may be one way of achieving the desired division. Alternatively, your ex may have a 401k or other retirement assets of equal value and the other side's entitlement to your plan is offset by your entitlement to his or hers. Finally, you may reach a resolution that enables you to compensate your ex for his or her share of your 401k in the form of other assets or reduced responsibility for marital debt.
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