I am 50 with $750K in a 401(k) and getting divorced. How should I safeguard my finances?

Divorces aren’t just emotionally draining. You also have to protect your finances during the ordeal to minimize how much you lose from the proceedings. A 50-year-old finds themselves in this position and wants to safeguard a 401(k) with $750,000 in assets. If it’s split down the middle, the spouse would have to part ways with $375,000.

There are some rules that can minimize how many of your assets go to your spouse in the event of a divorce. Furthermore, it’s good to know the tax implications of a divorce proceeding and how they may affect your 401(k) plan.

Check Your Local Laws

Each state has different rules around asset division. That’s why it is a good idea to consult with a local divorce lawyer to assess what will happen with the 401(k) assets. For instance, some states do equal division. A $750,000 401(k) gets split into two $375,000 accounts.

However, other states conduct equitable splits that factor in each spouse’s needs, their contributions to the marriage, and other factors. Men usually get left with the bag, but each divorce is different.

The 401(k) Is Eligible For Splitting

Retirement accounts are treated as standard assets in divorce. That means they are eligible to be divided among both spouses. A 401(k) retains this treatment even if you opened your retirement account before marrying.

However, only the money you contributed to a 401(k) during marriage is eligible for being split, and that includes any gains the portfolio accumulated during the marriage.

If the court decides to split the 401(k) money between both spouses, it will be done through a qualified domestic relations order. This is not a taxable event, and you won’t have to worry about triggering your 401(k)’s 10% penalty for making this transfer.

How To Protect Your Assets

If you aren’t married yet, a prenup is one of the best ways to protect your assets. Furthermore, you should keep any assets separate that you obtained before the marriage. For instance, if you bought a rental property before marrying, you should keep it in your name exclusively.

You should also close any joint accounts leading up to a divorce. A spouse can run through a joint credit card, which will also hurt your credit score. Similarly, a joint bank account is quite vulnerable to one spouse capitalizing on the extra funds, so it’s best to stop contributing to a joint account if a divorce is on the horizon.

If you didn’t use those safeguards, an irrevocable trust can be a great resource. Not every state considers irrevocable trusts as marital property, and self-settled trusts are also worth considering. It’s good to speak with a lawyer and an estate planner before creating a trust. That way, you can ensure that more of your assets are protected. 

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