Divorce in Minnesota often brings significant emotional and financial challenges, with one of the most intricate steps being the division of marital assets, such as retirement accounts.
For many couples, a substantial portion of their wealth is tied up in accounts like 401ks, which have been built up over years of marriage. Unauthorized withdrawals or sudden cash-outs of these accounts by one spouse can disrupt the division process, adding layers of complication to an already complex situation.
If you’re navigating a divorce in Minnesota and suspect that your spouse has improperly withdrawn or cashed out funds from a 401k account, it’s essential to understand how courts address such situations and how these funds are typically classified and divided.
In this blog, our team of Minneapolis divorce lawyers explains the handling of 401k accounts in a Minnesota divorce and what actions to consider if your spouse has accessed those funds.
How are 401ks Typically Divided in a Minnesota Divorce?
In Minnesota, almost all assets acquired during the marriage are considered marital property and subject to equitable division in a divorce. This includes retirement accounts like 401k plans.
When dividing a 401k or similar retirement asset, the court aims for a fair and balanced division, with the value of the account typically determined on a specified “valuation date,” such as the date of separation or the start of divorce proceedings.
There are several ways to divide a 401k in a Minnesota divorce:
- Cash-out and split the proceeds: The account holder cashes out the 401k, and the proceeds are split between spouses according to the divorce decree. This often incurs taxes and penalties.
- Transfer a portion to the non-account holder: Using a Qualified Domestic Relations Order (QDRO), a portion of the 401k can be transferred directly to the non-account holder spouse’s IRA account without tax penalties.
- Keep separate but divide the balance: The account remains in the account holder’s name, but a portion of the overall balance is considered assigned to the non-account holder. The non-account holder spouse is still entitled to their share of the 401k balance.
In deciding on a division method, the court considers factors such as the marriage’s length, each spouse’s financial needs, and contributions to the 401k. The goal is an equitable division that reflects the unique circumstances of each case.
What If Your Spouse Empties the 401k During Divorce?
Unfortunately, it’s not unheard of for the spouse who owns a 401k account to make unauthorized cash withdrawals or liquidate the account entirely during a divorce. This can throw a wrench into the asset division process.
Taking withdrawals or cashing out a 401k during divorce without the consent of the other spouse is generally prohibited, as the account is still considered joint marital property.
If your spouse took money from a 401k account during your Minnesota divorce proceedings without your consent, here is how it may be handled:
Accountability for Missing Funds
The courts will likely hold your spouse accountable for any money withdrawn or spent from the 401k during the separation and divorce process. Those funds will still be considered marital property up for division.
Your spouse may be ordered to pay you back your rightful portion of the 401k balance, either in one lump sum cash payment or through an offset of other assets and accounts he was entitled to keep.
Lost Growth and Interest
Not only will your spouse owe you a share of the withdrawn 401k funds, but you may also be entitled to compensation for the lost growth and interest those funds would have earned if left untouched.
Courts can require your spouse to pay you the amount the 401k withdrawal would have increased in value from the time it was taken to the time of divorce finalization. This aims to make up for the loss of growth you suffer from not having access to your share of funds.
Tax and Penalty Payments
If the 401k withdrawal was subject to income taxes and early withdrawal penalties, your spouse may be ordered to pay those costs directly. You generally should not be responsible for taxes and penalties associated with funds you never authorized withdrawing.
Account for these added tax and penalty payments when calculating the overall value owed to you for your share of the 401k funds.
How to Protect Your Interest in a 401k During Divorce
If you’re concerned that your soon-to-be ex-spouse may try to cash out a 401k account during your Minnesota divorce, here are some tips:
- Speak to your divorce attorney immediately about options to freeze assets through temporary orders. This prevents changes to accounts.
- If your spouse already withdrew money, ask your lawyer about sending a demand letter requesting the funds be returned to preserve the account balance.
- Seek a restraining order from the court preventing any withdrawals pending the divorce decree.
- Work with your attorney to draft the divorce decree promptly to officially dictate how accounts are divided.
- Request regular account statements so you can monitor the 401k balance. Any unexplained losses could indicate unauthorized withdrawals.
- Ask the court to award additional assets, more alimony, or interest to make up for any funds already withdrawn from the 401k by your spouse.
- Consider alternative dispute resolution like mediation to come to a swift agreement on asset division, including retirement accounts.
By taking proactive steps, you can minimize the chances that your spouse will cash out a 401k during divorce. An experienced Minnesota divorce attorney can help strategize how to protect your long-term financial interests during this process.
How to Recover If Your Spouse Already Cashed Out a 401k
Let’s say your spouse already withdrew or cashed out a 401k account during your separation, against your wishes and without your consent. While the money is gone, you may still have options to recover your rightful share of the retirement funds:
- Request documentation: Ask your spouse to provide account statements and records of any 401k withdrawals made after separation. This documents the violation.
- Send a demand letter: With your lawyer, send a formal letter demanding the withdrawn funds be redeposited into the 401k account to restore its balance. Set a short deadline.
- File a motion: If the funds aren’t returned, file a motion asking the court to enforce its automatic restraining order prohibiting asset dissipation.
- Ask for interest: Request that the court orders your spouse to pay interest (at the judgment rate or higher) on the amount withdrawn to account for lost investment earnings.
- Offset with other assets: Request that the court award you a greater share of other marital property like the house, investments, etc. to offset your share of the cashed-out 401k.
- Request attorney fees: Ask that your spouse pays your attorney fees related to addressing the improper 401k withdrawal since their actions complicated the divorce.
- Alimony or child support: If your spouse spent the 401k funds already, seek higher alimony payments as compensation for the missing retirement funds.
While you may not get back the exact 401k funds withdrawn, there are ways the court can compensate you financially for your rightful share.
An experienced divorce lawyer can help put a dollar figure on your portion of the cashed-out 401k and make a case for recovering that value elsewhere in the divorce settlement. Don’t let a sneaky spouse get away with reducing your long-term financial security in the divorce.
The Divorce Lawyers at Martine Law Can Help You Protect Your Assets During Divorce
Divorce is already challenging, and the risk of a spouse improperly draining retirement accounts like a 401k only adds to the stress. Unfortunately, disputes over assets can sometimes lead to such actions, especially in high-conflict divorces.
If you suspect your spouse is concealing, withdrawing, or misusing marital assets during your Minnesota divorce, reach out to the dedicated family law attorneys at Martine Law.
Our team has extensive experience in complex asset division and high-net-worth divorce cases. We can help protect your rights by reviewing account records for unauthorized withdrawals, sending formal demands, and taking immediate legal steps if necessary to safeguard your assets.
Don’t let a difficult divorce put your financial future at risk—contact us today to schedule a free consultation and learn how we can assist you.
