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What mistake should I avoid while splitting a 401(k)?

On Behalf of | Aug 2, 2021 | divorce |

Your upcoming divorce is bound to complicate your retirement plans because you will have to divide your marital assets, which will include retirement accounts like your 401(k) that you have built up during your marriage. So it may help you to avoid mistakes that could unnecessarily deprive you of retirement money.

One possible mistake is to split your 401(k) with your spouse by dollar amount. While this may seem like a standard procedure to divide a 401(k) account, the result might not turn out as you expect.

The problem with amount division

It is possible that a divorce court will want you to split your 401(k) in half, with you and your spouse each getting 50%. So you might decide that your divorce decree should divide the account by giving your spouse exactly half of the 401(k)’s total funds at the current moment.

As CNBC explains, 401(k)s may post gains and losses. Say your 401(k) has $120,000 and you decide to give your spouse $60,000. In the meantime, the account loses some of its value due to an economic downturn. By the time your spouse receives the money, $60,000 might actually be a majority of the funds in the account instead of just half. This would leave you with a smaller amount than you had intended.

The benefit of using percentages

You might avoid this problem if your divorce settlement divides your account by percentage. If half of your 401(k) goes to your spouse, your divorce settlement should specify that 50% goes to your spouse. So even if your account posts losses or gains, your spouse will not get more or less than 50% of the 401(k).

This might seem like a small mistake that will not produce much loss to you, but your 401(k) is a valuable tool to fund your retirement. If you believe bankruptcy is on the horizon, courts protect 401(k)s from creditors. They might not do so for other accounts like IRAs. It can be worth it to keep an eye on anything that might help you hold on to your retirement money.