EP 115: Dividing Your 401K (403b, 457, and Defined Contribution plans) during Divorce

This episode of the Divorce and Your Money podcast is about a specific type of retirement plan called a defined contribution plan. The most common defined contribution plan is a 401(k). Dividing these assets during divorce is complicated, so you are likely going to need a specialist.

You are probably familiar with 401(k) plans, but there are other defined contribution plans, such as 403(b), 457, and thrift savings. If you have one of these plans, you will make regular contributions as an employee (hopefully over many years). Your employer may also contribute to your plan. The funds will accumulate while you are of working age.

How much money you have in retirement depends on how much you have contributed, and how well the investments perform over time.

You can contrast these plans with defined benefit plans (such as pensions). If you have a pension, you are guaranteed a set amount of money every month when you retire.

The benefit is defined, but the contribution is not. You do not know exactly how much you are contributing each year. Both a benefit and a contribution are very different from Individual Retirement Accounts (IRAs), which were discussed in Episode 19. This episode will focus on defined contribution plans, but it will not discuss these other types of retirement plans.

If you have a 401(k) plan and are going through a divorce, you will need a Qualified Domestic Relations Order (QDRO). A QDRO (pronounced “quadro”) is a legal document that says how the asset should be divided.

You will need a specialist to put this document together, because every defined contribution plan has different rules to follow. For example, some plans require you to specify the percentage of the plan that will go to your spouse. Other plans will need the number of shares that go to your spouse, and your QDRO will be rejected if you offer a percentage.

Most divorce attorneys are not experts in QDROs. It is best to prepare the QDRO and send it to your plan’s administrator as early as you can. It will take several weeks to prepare the QDRO, and it may need to be resubmitted if there are any errors.

The best QDRO companies will do a preapproval. They contact your plan administrator with the details to see if their preliminary QDRO meets the administrator’s requirements. This preapproval will reveal any problems ahead of time, so they can be fixed. At that point, you will hopefully be able to access to those funds sooner. This kind of prevention can save you time and money.

Your attorney has probably worked with someone who is very good with QDROs, but if not, do your own research. Look for QDRO companies online and ask for reviews.

One thing to note: If you are having difficulty paying for your divorce or other expenses, you can take out a loan against your 401(k).  Your plan administrator will probably be able to offer a low-interest loan equal to 25-50% of the value of your 401(k). The remainder of your 401(k) will serve as collateral, so if you stop making payments on the loan, they can take the money from your 401(k).

Final thoughts

All defined contribution plans are complicated, and divorce adds another layer. Every plan is different. Try to initiate the QDRO as early as possible, so you can avoid prolonging the divorce process.