There are two types of property that spouses have to disclose to one another and possibly the courts when they divorce. Spouses need to prepare inventories accounting for their marital property and also their separate property.
Assets that people already owned before getting married, protected with a marital agreement or inherited are often their separate property. Resources acquired during the marriage or purchased using marital income are often marital property. Considering both marital and separate property is an important part of finding a fair solution for property division matters. Occasionally, spouses find themselves disagreeing about what assets are marital and which ones are separate.
Is a 401(k) account held in the name of one spouse and funded solely by that spouse their separate property?
Retirement accounts may be partially separate property
Some people mistakenly think that being the only one to contribute to an account makes it their separate property. They point to their name on the ownership paperwork as a clear indicator that their spouse has no interest in the account. Others reference the fact that they may have begun funding the account prior to marriage as a sign it is their separate property.
Premarital contributions may remain the separate property of the account holder. However, contributions made during the marriage are likely subjected to division. That is as true for employer matching amounts as it is for direct payroll contributions.
It can be a challenge to evaluate a retirement account when preparing for divorce in part because spouses have to determine how much of the 401(k) is subject to division and how much remains the separate property of the account holder.
Splitting the account isn’t mandatory
People who have saved for retirement worry about losing their savings to taxes and penalties. While spouses have to disclose the account and establish how much of it is separate and how much is marital, they do not necessarily have to split the account as part of the property division process.
It is possible for people to fairly divide the marital estate by factoring in the value of a 401(k) without directly splitting the account. When dividing the account is necessary, it is usually possible to divide the count without risking the income tax consequences and penalties with the right approach.
Learning more about what happens to valuable marital resources during divorce can help people prepare for negotiations, litigation and rebuilding their finances after the divorce. Retirement accounts are a common source of contention, so learning how to address them early can be beneficial.
