Getting divorced in Minnesota? One of the most complex assets to divide is often retirement accounts like 401k. While the process differs depending on the type of account, the main challenge is determining what portion of the account is considered marital property versus separate property.
So, how do you calculate the marital portion of a 401k in a Minnesota divorce? Here’s what you need to know:
What Makes a 401k Marital Property in Minnesota?
In Minnesota, all property acquired by either spouse during the marriage is generally considered marital property, regardless of whose name it is in. This includes retirement accounts like 401k.
The key factors that make a 401k a marital asset include:
- The contributions and growth occurred during the marriage – even if only one spouse worked.
- It doesn’t matter whose name the 401k account is under – if contributions were made during the marriage, it is likely partly marital.
- Both “defined benefit” and “defined contribution” 401k plans are marital property.
- The 401k is subject to division in divorce as part of the equitable distribution of assets.
So, if you or your spouse contributed to a 401k during your marriage, it is considered at least partly marital property in Minnesota. This applies to most 401k accounts opened after marriage.
How is a 401k Divided in Divorce in Minnesota?
Dividing a 401k in a Minnesota divorce requires the following specific steps:
- Value the account – Determine the total balance or present value of the 401k as of the date of separation or divorce. This is needed to calculate the marital portion.
- Calculate marital portion – Figure out what percent or dollar amount of the account is marital using an accrual method (see below).
- Draft a QDRO – A Qualified Domestic Relations Order (QDRO) must be approved by the court and 401k plan administrator to divide the account.
- Distribute funds – The 401k funds are distributed according to the QDRO when permitted – such as at retirement. Taxes and penalties apply if taken out earlier.
Let’s look at each of these steps in more detail:
Valuing the 401k
The first step is to get a statement of the 401k account’s total value as of the date you separated or divorced. This provides the number to which you’ll apply the marital portion percentage.
The plan administrator can provide the exact account balance. You may need to subpoena records if the other spouse doesn’t share them voluntarily.
If no statement is available, financial records can help estimate the balance. Your divorce lawyer can help obtain and confirm the value.
Calculating the Marital Portion
Next, you’ll need to calculate what percent or dollar amount of the total 401k balance is considered marital property in Minnesota.
There are two main methods used:
Accrual Method
The accrual method looks at the number of months the 401k account accrued value during the marriage.
For example:
- Total months married: 144 months
- Months the 401k accrued value: 120 months
- Marital portion: 120/144 = 83%
So 83% of the total 401k balance would be marital property. The remaining 17% accrued before or after marriage and is separate property.
This method is simple but doesn’t account for fluctuations in contributions over time.
Coverture Fraction
The coverture fraction considers the time married and the amount contributed during that time.
Here is the formula:
- Months married during which 401k accumulated / Total months 401k accumulated value
For example:
- Months married while contributions made: 120
- Total months account holder made contributions: 240
- Coverture fraction: 120/240 = 50%
This shows that 50% of the contributions and growth occurred during marriage. So, 50% of the total 401k balance would be marital property in Minnesota.
Your divorce attorney can help run the numbers to determine the most accurate marital portion percentage.
Drafting a QDRO
To legally divide a 401k in divorce, a Qualified Domestic Relations Order (QDRO) must be submitted to the court and approved by the 401k plan administrator.
A QDRO specifies:
- The amount or percentage of the 401k awarded to each spouse
- How/when funds will be distributed
- Any survivorship benefits
- Which spouse pays taxes
Drafting a QDRO that follows all legal requirements can be extremely complex. Getting expert help from a family law attorney is highly recommended to avoid issues down the road.
Distributing the Funds
The QDRO will dictate how and when the 401k funds get distributed after the divorce.
Some key things to know:
- The account cannot be divided until the divorce is finalized.
- Funds are typically distributed when the account holder retires. Taking funds out earlier results in taxes and penalties.
- The funds awarded to the non-account holder spouse are transferred tax-free to an IRA in their name.
- Each spouse must pay taxes when withdrawing their portion later on.
Understanding the distribution rules is vital, so speak to your financial advisor and divorce attorney. With proper planning, dividing a 401k with a QDRO allows you to access your share penalty-free.
What If a 401k Was Started Before Marriage?
If contributions were made to a 401k before marriage, the amount accrued pre-marriage is considered separate, non-marital property.
In this case, only the contributions and growth during the marriage would be marital property up for division in divorce.
To determine the marital portion:
- Confirm the pre-marital account balance – get records from as close to the wedding date as possible.
- Calculate the marital portion accrual using one of the methods above, counting only from the marriage date.
- Subtract the pre-marital balance from the current balance first to isolate the amount accrued during marriage.
For example, if your spouse had a $20,000 401k balance pre-marriage, and the current balance is $80,000, the marital portion is $60,000 ($80k total – $20k pre-marital).
The pre-marital $20,000 remains your spouse’s separate property, not subject to division. Speak to a qualified family law attorney to ensure the calculations are done correctly in this scenario.
Splitting a 401k Fairly in Divorce
There are a few options on how to actually split a 401k in divorce once you’ve isolated the marital portion:
- Divide it equally – Each spouse gets exactly 50% of the marital portion. This is common if contributions are made jointly.
- Give it all to one spouse – One spouse keeps the entire 401k account. The other spouse gets an offsetting asset of equal value, like the house.
- Percentage split – The marital portion is divided according to negotiated percentages, like 60/40. Factors like income and needs may come into play.
- Combine methods – For example, splitting another retirement account evenly while one spouse keeps this 401k.
Deciding what is fair and equitable will depend on the total assets and debts involved in your divorce. A local family law attorney can advise you on the options.
Getting Professional Help With 401k Division
Dividing retirement accounts like a 401k is one of the most complicated parts of divorce. To avoid costly mistakes and negotiate a fair settlement, it pays to work with an experienced divorce lawyer.
At Martine Law, our Minneapolis family law attorneys can guide you through the process. We have extensive experience valuing 401ks, determining marital portions, drafting enforceable QDROs, and negotiating equitable splits.
Whether you want to fight for every penny in your 401k or are willing to compromise, we’ll stand by you through the divorce process. Don’t risk losing your hard-earned retirement savings. Contact us today to discuss your best options for dividing a 401k account in your Minnesota divorce.
