For most families, their 401K retirement plan from work is the second largest asset an average family holds (second only to their family residence). How is this treated in a divorce proceeding in California which is a community property state? It depends on how it is characterized whether separate property, community property, or part separate and part community.
If all your contribution to your 401k plan made prior to the marriage or after separation, then your 401k plan will be characterized as your separate property. In a divorce, your separate property 401k plan will not be divided and will be awarded 100% to you.
On the other hand if all your contribution to your 401k plan was made during the marriage, then the retirement plan will be characterized as community property. Marriage is the period from date of marriage to date of separation. This means your 401k retirement plan will be divided 50/50 between you and your spouse. Since 401k retirement plan is subject to ERISA, a QDRO is necessary to divide the plan. A QDRO is a Qualified Domestic Relations Order prepared by your attorney filing with the Court subject to the retirement plan administrator’s approval. Once the QDRO is approved by the plan and signed by the Court, the QDRO is sent back to the plan which implements the division of the 401k plan. Half of the community interest in the 401k plan will be transferred to a new account set up under the non-employee spouses’ name.
This division of the 401k plan is not a taxable event and will not have any tax consequence since the non-employee spouses’ portion will simply be transferred to another tax deferred account under the non-employee spouse’s name.
It gets more challenging when the contributions to your 401k plan occurred partly before marriage and partly during marriage. In that situation, an apportionment would have to be made between separate property and community property. Your spouse will be entitled to half the community interest in your 401k plan. The community portion of the 401k plan gets to share in its pro-rata share of investment gains and income of the 401k plan and not just the original contributions. As stated previously, the non-employee spouse’s half of the community interest in the plan will be divided via a QDRO.
If your divorce case is resolved by settlement rather than trial, it is also possible to negotiate that your entire 401k retirement plan be awarded 100% to in exchange for either a cash buy out to your spouse or offering your spouse other assets in exchange for your spouse’s half of the community interest in the 401k plan. In that scenario, there will be no need to divide your 401k plan with a QDRO. The divorce judgment would simply award the entire plan to you with a corresponding asset awarded to your spouse.
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Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, APLC This article is not a solicitation.
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Attorney Kenneth Ursua Reyes is a Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He is a graduate of Southwestern University Law School in Los Angeles and California State University, San Bernardino School of Business Administration. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, APC. is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail [email protected] or visit our website at Kenreyeslaw.com.
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