Dividing Your 401(k) in an Arizona Divorce

A 401(k) is a retirement savings account offered by many employers in the United States. It allows employees to contribute a portion of their salary before taxes, sometimes with the employer’s contributions. During an Arizona divorce, 401(k) accounts can become part of the marital property that must be divided if all or part of the funds were accumulated or enhanced in value during the marriage.

Arizona is a community property state. This means that all marital assets acquired during a marriage are considered jointly owned by both spouses. In the context of a 401(k), this applies to any contributions made to the account, as well as any growth on those contributions, during the marriage. For example, if you had a 401(k) with a $10,000 balance before you got married, and during the marriage, the balance grew to $50,000 due to your contributions and investment gains, the increase of $40,000 would be considered community property.

On the other hand, funds that were contributed to the 401(k) before the marriage, or any growth on those contributions that occurred before the marriage, are considered separate property of the spouse who originally owned the account.

The general rule is that any growth on a 401(k) during the marriage is considered community property, even if the initial contributions were made before the marriage. Proving that any part of 401(k) is separate property requires authoritative documentation, such as account statements or payroll records from before the marriage.

A prenuptial agreement between the spouses can specify how retirement accounts will be handled in the event of a divorce. This can be a valuable tool to protect pre-marital assets from being classified as community property.

Once the community property portion of the 401(k) is determined, it is generally divided equally between spouses. However, there can be exceptions. For instance, if one spouse significantly dissipated marital assets during the marriage, the court may award a greater portion of the remaining community property to the other spouse. A skilled Arizona divorce attorney can take the appropriate steps to protect your 401(k) to the extent allowed by law.

Dividing a 401(k) involves special requirements, including the obtaining of a Qualified Domestic Relations Order (QDRO) from the family court. A QDRO instructs the 401(k) plan administrator on how to divide the community property portion of the account and transfer it to the other spouse's account or individual retirement account (IRA). Without a QDRO, any withdrawals from the 401(k) are subject to early withdrawal penalties and the distributions to your spouse could be considered taxable income. 

The lawyers at Clark & Schloss Family Law, P.C. in Scottsdale are experienced in helping Arizona residents deal with all property issues that arise in the divorce process in order to obtain the most favorable outcomes possible. To schedule a consultation, call 602-789-3497 or contact us online.