Published on August 2, 2021

401k and Divorce in Washington State

If you are facing a divorce, you naturally have financial concerns about the division of your marital property (called community property in the State of Washington). In the State of Washington, those assets you acquire as a married couple or that you acquire separately over the course of your marriage are considered marital property that will be divided equitably, which means fairly (once the circumstances of your marriage are factored in). If you are wondering what role your 401k will play in this calculation, it is a legitimate concern that you should address head-on from the outset. Understanding the basics as they relate to the division of your marital property and your 401k and having an experienced Yakima divorce attorney on your side is an excellent place to start.

How Are Retirement Accounts Split in a Divorce?

When it comes to divorce, your 401k can be a tricky asset. For example, if you married young and grew your 401k throughout your marriage, its entire value is very likely marital property in the eyes of the law. If, however, you brought a hefty 401k into your marriage with you, things are more complicated. The value of your 401k prior to marriage is probably your own separate property, but any increase in value will almost certainly be considered marital property. This is an important distinction to keep in mind moving forward. Ultimately, marital property – including retirement accounts like your 401k (or the portion of your 401k that is marital property) will be divided equitably, which can mean many different things (depending upon the circumstances involved).

The Equitable Division of Marital Property in Washington

How your 401k will be affected by your divorce in Washington relates directly to the equitable division of your marital property, and as such, it is a good idea to understand those factors that guide this division, including:

The overall size of your marital estate
The length of your marriage
You and your divorcing spouse’s separate assets (and debts)
You and your divorcing spouse’s current economic situations (individually)
Either spouse’s contributions to the other spouse’s career (examples include if one of you worked to put the other through school or if one of you stayed home and cared for the children while the other built a lucrative career)
Whether or not your divorce involves one of you staying in the family home with your children (as the primary custodial parent)
Any other factors that the court deems relevant to the division of marital property in your divorce

Because Washington is what is known as a no-fault divorce state, any wrongdoing on the part of your spouse will not play a role in how your marital property is divided. If, however, your spouse wasted or otherwise reduced your marital assets artificially, the judge can – and very likely will – allow this fact to directly affect your community property award.

How Do I Protect My 401k in a Divorce?

Generally, the only way to ensure that your 401k remains your own separate property is to have addressed the matter in a legally binding prenuptial or postnuptial agreement. Barring this, the best way to protect your 401k is to carefully focus on your divorce negotiations as they relate to the division of your marital property. Toward this end, one of the most important steps you can take to help ensure that you protect your interest in your 401k throughout the divorce process is working closely with a dedicated divorce attorney from the very beginning.

401k: The Most-Common Forms of Division

Your 401k has its own unique terms and conditions built-in, which will guide your decisions in the negotiation process and will determine the best manner of division for you in your situation. This said, there are four common approaches to dividing the value of 401k in divorce.

One: Receiving Other Assets of Similar Value

One approach is simply giving your spouse another asset in exchange. This approach – in essence – amounts to buying out your spouse’s ownership in your 401k with another asset of similar value. This is, in many ways, the most straightforward approach because it means that you won’t need to dip into your 401k and won’t need to engage in the legalities involved in the process. On the flip side, if your 401k has considerable value, you may not have another asset of similar value – or the only asset in the same ballpark may be your family home, which can instigate complications of its own. If you do go this route (regardless of the other asset involved), you’ll need to obtain accurate valuations for both your 40lk and for the other property and will need to carefully consider all tax implications involved.

Two: Splitting the 401k Itself

While splitting your 401k involves exacting administrative efforts, it is the most straightforward approach in terms of dividing the value of the account. In order to split your 40lk in divorce, you’ll need to employ a Qualified Domestic Relations Order (QDRO). Your QDRO is a court order that allows your 401k account to pay out a specific percentage to an alternate payee (your divorcing spouse). The least complicated and often the most beneficial path forward tends to involve having the QDRO stipulate that the retirement account will be divided into two separate accounts. This allows you to continue contributing to, managing, and growing your own account (until you’re ready to receive distributions), while your ex is free to manage his or her own account as he or she sees fit. The most important note to make here is that there will be considerable and exacting administrative work involved, and because 401k plans have their own unique rules and regulations, it’s important to move forward with a thorough understanding of what is expected of you in order to ensure that the process is as efficient as possible.

Three: Rolling over a Portion of Your 401k

If you have reached the age of 59 and a half or have left the company from which your 401k originated, you may be able to roll over your soon-to-be ex’s percentage of ownership into an IRA (or another investment option) for him or her. This allows you to divide out your divorcing spouse’s ownership without incurring any financial penalties (including tax liability) of your own, and it allows your ex the freedom to exercise greater financial control over his or her allocation of your 401k account.

Four: Liquidating Part of Your 401k

There are generally complicated legal requirements for liquidating a 401k, and you can expect the tax consequences to be quite steep. In other words, liquidation is only a good option when it is the least financially burdensome of the options available to you. For example, if you need a portion of your divorcing spouse’s 401k just to stay financially afloat throughout the divorce process, liquidation may be the best choice of a bad lot. If liquidation becomes a necessity, keeping the tax implications at the forefront of your decision-making process is critical.

If You Both Have 401ks

As you may have gathered, the division of a 401k can be one of the most complicated and laborious financial matters you will encounter in the already complicated divorce process. If you and your divorcing spouse both have a 40lk, it can alleviate some of the pressure to get the division right. If your retirement accounts are fairly equal in value, each of you keeping your own is obviously the easiest answer (and can avoid significant complications, effort, and expense). If, on the other hand, one account has considerably more value than the other, addressing the discrepancy in value can be less arduous than equitably balancing the value of one account between the two of you.

Should I Cash out My 401k before a Divorce?

If you are thinking that you can cash out your 401k prior to divorce in order to protect your assets, this isn’t how it works. In fact, any funny business when it comes to the division of marital property can end up working to your distinct disadvantage. Any portion of your 401k that is deemed marital property, regardless of whether you liquidate it or not.

If You Need Cash

Divorce may negatively affect your finances, and if you need cash to help you support yourself while you look for work, purchase a home, or engage in any number of expensive endeavors that those going through divorce often encounter, liquidating your 401k may be the best option. If you are considering cashing out your retirement account, keep the following in mind:

In general, cashing out a 401k prior to the owner turning 59 and a half incurs a 10 percent penalty (in addition to the income tax implications, which are commensurate with the percentage of income tax the owner pays).
An early withdrawal (as opposed to cashing out completely), however, can be accomplished as part of your divorce settlement without a financial penalty by implementing and following the exacting rules of a QDRO (which protects the owner of the account from direct financial penalties).

A Note about Cashing Out

In a divorce, you are legally required to share all financial information with your divorcing spouse. This makes failing to do so the crime of perjury (lying to the court), and the judge will take this fact into careful consideration when determining the division of your marital property. In other words, cheating the numbers is almost certain to work against you. All of the following attempts to decrease your financial burden during divorce can be deemed a form of perjury by the court:

Cashing out your IRA in an attempt to keep the funds for yourself
Selling off or gifting assets
Hiding assets
Undervaluing or devaluing assets
Failing to be forthcoming with financial information

401k Divorce Penalty

Ultimately, you will need to carefully consider how your 401k is structured, the circumstances of your divorce, your current financial needs, your long-term financial goals, and more when making your 401k-related decisions. All told, it’s complicated, and seeking the professional legal guidance of a savvy divorce attorney from the outset is well advised. The financial penalties associated with dipping into your 401k early can take many forms, including:

Without a QDRO in place, there is a 10 percent penalty right off the top (prior to the owner turning 59 and a half).
The withdrawal (or cash out) will be reported on your taxes as income, and you’ll be taxed at your annual percentage rate.
If the withdrawal happens before your divorce is finalized, the account owner will shoulder the financial burdens involved (unless specifically negotiated otherwise in your divorce decree).

Seek the Professional Legal Guidance of an Experienced Yakima Divorce Attorney Today

If you are going through a divorce, your financial rights and your future finances are at stake, and your 401k can feature prominently in the division of your marital property (a primary component of the divorce process). Whatever your divorce concerns, the trusted divorce attorneys at Dobbs & Young in Yakima are committed to employing the full force of their experience and legal insight to bring your divorce to the most favorable resolution possible. To learn more about how we can help, please don’t delay reaching out and contacting or calling us at 509-577-9177 today.