Getting divorced can be an emotionally and financially difficult time. One of the most complex issues to navigate is how retirement accounts like 401k are divided. This is especially true in Minnesota, which follows “marital property” laws.
Under Minnesota law, almost anything earned or purchased during the marriage is considered marital property, including retirement accounts contributed to during the marriage. This means your 401k can be divided between you and your spouse as part of the divorce settlement.
While you may not be able to prevent your ex-spouse from getting a portion of your 401k, there are steps you can take to protect as much of your retirement savings as possible.
Is My 401k Considered Marital Property in Minnesota?
A 401k plan is generally considered marital property or asset under divorce law. This means it is subject to division between spouses as part of the divorce settlement. The extent to which a 401k must be divided depends on whether you live in a community property state or an equitable distribution state.
In community property states, all marital property is divided equally between spouses. This usually means each spouse is awarded 50% of the account balance in a 401k accrued during the marriage. In equitable distribution states, assets are divided fairly based on various factors determined by the court. An equitable division does not necessarily mean an equal division.
How Are 401ks Typically Divided in a Minnesota Divorce?
There is no set formula in Minnesota law on how to divide retirement accounts in divorce. The court will aim for an “equitable” division, which means fair but not necessarily equal.
Some common approaches include:
- Equal division: Each spouse gets 50% of the marital portion of the 401k. This is common when the rest of the marital assets are also split 50/50.
- Proportional division: The 401k is divided according to each spouse’s proportional earnings during the marriage. For example, if you earned 80% of the income, you may get 80% of the 401k balance.
- Offset with other assets: One spouse keeps the full 401k balance, and the other gets offsetting assets of equivalent value like the house, car, etc.
- Deferred division: The non-owner spouse gets a set dollar amount or percentage paid out of the 401k once the owner starts making withdrawals. This uses a QDRO (explained more below).
No matter the approach, the goal is a fair overall division based on factors like length of marriage, contributions, other assets, and more. Having an experienced divorce lawyer can help maximize your share.
The Impact and Tax Consequences of 401k Withdrawals
Taking an early withdrawal from a 401k usually triggers a 10% penalty. However, under certain circumstances, a spouse can take a full or partial cash distribution from a 401k as part of a divorce settlement without penalty.
This requires a Qualified Domestic Relations Order (QDRO). A QDRO is a special court order that allows retirement account assets to be paid to a spouse as part of the divorce settlement.
With a QDRO, the spouse can take a lump sum distribution from the 401k tax-free. However, they must report the cash-out on their tax return, paying ordinary income tax on the amount withdrawn.
Is it Possible to Legally Hide a 401k in a Divorce?
Hiding assets during divorce is illegal in Minnesota. Any assets acquired after the date of marriage are considered marital property.
While the accounts may be in your name alone, you still have a duty in the divorce proceedings to disclose all marital assets. This includes retirement accounts like 401k.
Not disclosing accounts or lying about balances is considered fraud and perjury. If caught hiding accounts, you could face penalties, fines, or even criminal charges, depending on the circumstances.
Plus, even if you did manage to hide the 401k temporarily, your spouse can still come after the marital share later. The division of assets outlined in the final divorce decree is binding. So, failing to disclose will likely only delay the inevitable.
Tips to Protect Your 401k During a Divorce
While you cannot hide a 401k in a divorce, there are some steps you can take to help protect your retirement savings and get a fair outcome:
- Consider taking out a loan – If permitted by your plan, you may be able to take a 401k loan before the divorce is finalized. This removes money from the account, reducing the balance that may be divided. However, make sure the loan terms comply with federal limits and that you can afford the loan payback terms.
- Do not make withdrawals – Taking money out of your 401k could result in taxes, penalties, and loss of retirement funds. Do not make withdrawals or cashouts unless absolutely necessary.
- Change beneficiaries – Update your beneficiary designations as the divorce is initiated. This gives you control over who inherits the assets if something unfortunate happens during the proceedings.
- Split the balance – If other assets are available, consider offering your spouse a greater share of those in exchange for retaining a larger portion of your 401k to protect your retirement security.
- Seek professional advice – Work with an experienced family law attorney and financial advisor to understand all your options under state law for handling 401k division. They can help you negotiate and structure a settlement that is fair while also safeguarding your retirement needs.
- Obtain QDROs – Request that the court issue Qualified Domestic Relations Orders (QDROs) to divide the 401k formally. This helps protect each spouse’s share after the split.
- Delay division – If permitted in your case, you may be able to postpone actual account division until a later period, such as when you reach retirement age. This allows you to retain control over the account for the time being.
Dividing retirement benefits like 401k requires help navigating complex legal and tax implications. An experienced Minnesota divorce lawyer can answer your questions, review your unique situation, and develop a smart negotiation strategy to protect your hard-earned retirement savings during and after divorce.
At Martine Law, our divorce attorneys have helped many Minnesota residents protect assets like 401k through the divorce process. We have extensive experience with retirement account division and can advise you on options like QDROs.
Don’t risk your financial future by trying to hide accounts. Contact us today to schedule a case review.
