“ Will I lose my 401(k) if I divorce my spouse? ” This is actually the most common question divorce lawyers listen to once the child-related questions are answered. Unfortunately, there is no simple answer. In summary – the value of the 401(k) is going to be considered in a final division from the marital estate regardless of who in fact receives it in the end.
Pursuant to Indiana Code 31-15-7-4, the court should divide every asset of the events regardless of whether it was owned by possibly spouse before the marriage, acquired by either spouse in his or her very own right after the marriage but before final separation of the parties, or acquired by their joint efforts. In other words, every financial debt and every asset that existed on the date of filing for divorce, must be included in the marital “ pot” and must be divided in a fair and equitable manner either by court or by agreement.
Further, pursuant to this statute, the court should “ presume” that a 50/50 division of the marital pot is a fair and equitable division. But which is just the starting point! A party may refute the presumption in favor of a 50/50 division based on the unique circumstances of his or her case. Let’ s look at two very different circumstances and the outcomes for each.
1 . Mary and John. Mary worked throughout the marriage and contributed significant sums of money to her 401(k), now worth $200, 000. 00. She will owe taxes of approximately $24, 000 when she withdraws that will money, so the post-tax value will be roughly $176, 000. She also saved what she could over the years and had $74, 000. 00 in her own savings account. This is post-tax cash. The total post-tax value of both accounts, therefore , is $250, 000. 00. Mary is concerned that she will need to give John half of her hard-earned money in the event of a divorce.
John also worked throughout the marriage, earning slightly more than Mary, and virtually all of his income was used to pay the day to day expenses for that family. He also paid for the particular luxuries the family enjoyed such as holidays to exotic countries, horse-back using lessons for their daughter, and journey soccer expenses for their son. The parties own a home with equity of $250, 000. 00. Simply no taxes would have been owed upon that real estate if it had been deeply in love with the date of filing. John wants to keep the home but he’ s worried that he will have to take out an additional mortgage in order to pay Mary her half of the equity.
This is an easy one. These circumstances lend on their own to a 50/50 division of the marital estate. The argument for a 50/50 division is that both parties contributed to the total value of the marital estate – Mary to the savings, which the parties would enjoy in their old age, and John to the family’ s i9000 high standard of living. The dilemma is that John can enjoy the marital residence right this moment while Mary cannot enjoy her 401(k) until she turns a minimum of 59 ½ years old.
In order for each part of have equal access to the funding available in the marital estate, then, the particular parties would have to divide the 401(k) equally, divide the savings equally, sell the house and share the profits equally (or John would have to take out a mortgage in order to pay Mary her share of the equity).
However , if the $74, 000 savings is enough cash for Mary to purchase a new home and to keep the mortgage payments within her spending budget, the solution that addresses both parties’ original concerns would be for Mary to keep the 401(k) and cost savings while John keeps the home.
So – the answer to Mary’ s question is “ no – a person don’ t have to lose your own 401(k) if you divorce your spouse. ” However , you must include this in the marital pot and you should divide that pot in a fair and equitable manner.
Parties who collaborate towards a fair and equitable end result that addresses each parties’ problems have the added benefit of keeping attorney fees low and preserving a lot of marital estate for the parties and their children.
2 . Susan and Alex. Alex had a 401(k) worth $200, 500. 00 when he married Susan and contributed an additional $100, 500 after the marriage. Susan had a 401(k) worth $50, 000. 00 when she married Alex, made no further contributions afterwards, and withdrew the money to pay for a late honeymoon vacation trip to Europe. By the time taxes and penalties were removed, Susan’ s i9000 $50, 000 had been reduced to $35, 000. 00. There was no prenuptial agreement. Susan and Alex were married for 3 years and had no children together. Susan threw in the towel a good job and stayed home to care for her two kids from a prior marriage. Susan also entertained Alex’ s client’ s i9000 at home and otherwise helped Alex grow his clientele during the yrs she did not work. Assuming that Husband’ s 401(k) is the only marital asset to be divided, the question of “ how” is not so easy!
Pursuant to I. C. 31-15-7-4, Husband’ s i9000 entire 401(k) must be included in the marital pot even though most of it was gained prior to the marriage. Susan’ s pre-marriage 401(k) does NOT go in the pot because it no longer existed on the date of filing for divorce. However , the court may consider all the factors involved in this case in order to choose an equitable way to divide Husband’ s 401(k).
The factors a courtroom might consider include the following:
a) Susan spent her pre-marriage 401(k) on the couple while Husband kept their pre-marriage 401(k) intact,
b) Susan could stay at home and care for her kids while Alex supported the household in the income,
c) Because Susan did not function during the marriage, she was able to amuse clients and otherwise help Alex increase his income,
d) Susan will be capable of earning a significant income but will earn considerably less than Alex,
e) Husband earned $100, 000 from the 401(k) during the marriage.
In a real life scenario similar to this one, the parties agreed that Alex would pay Susan the sum of $150, 000. 00, that is 50% of the entire 401(k). This particular agreement acknowledged the fact that Susan helped Alex grow his business throughout the three years they were married, the fact that she’d be starting over once she found new employment, the fact that she made less money that Alex, the fact that she would not be able to replace the particular $50, 000 she spent on the particular couple, and the fact that Susan obtained the benefit of staying home with her children.
Could a court have awarded Susan a lesser amount? Yes, certainly! However , Alex was concerned that will his attorney fees would be more expensive than the additional money he agreed to pay Susan. He was also concerned which he might be ordered to pay some of Susan’ s attorney fees because of the difference of income between the parties. So – the agreement benefited both parties. The important thing is that Susan and Alex both felt that their negotiated agreement was fair and equitable and that they both saved face and money by not litigating these types of matters in a public forum.