There are many benefits to funding a 401(k). Frequently, well-compensated individuals can make enough contributions to reduce their annual income tax liability. Additionally, they may be eligible for employer-matching amounts.
They can accumulate savings much more quickly than they might if they simply set aside a portion of their resources into a designated savings account. Married couples may expect to pull funds from a 401(k) during retirement. However, those plans may shift dramatically if either spouse files for divorce.
What typically happens to a tax-deferred retirement savings account, such as a 401(k), during a Michigan divorce?
The account may be subject to division
Professionals who have saved for retirement for years may be under the misconception that a 401(k) is their separate property. They may not think it is subject to division when they divorce.
However, being the sole owner of the account does not make it separate property, and neither does making contributions before the marriage began. Spouses may need to go over the deposit history for the account to calculate what amount of the balance is separate property from before the marriage and what is marital property.
They can then use that marital portion of the account when negotiating terms for other assets. The use of the right documentation allows for the division of the account without income tax consequences or a 10% penalty.
Spouses who understand property division rules can advocate for the best possible terms and protect key resources during divorce. Setting specific goals and discussing concerns with a family law attorney can help people navigate divorce with fewer secondary losses.