How to Protect Your 401(k) During a Maine Divorce
No one who gets married envisions having to protect their assets in a divorce later, but unfortunately, divorce is just a part of our society today. And while divorce rates have actually declined over the last ten years many couples, even in Maine boasts one of the lowest divorce rates in the United States at 4.8%, still find they just can’t make their marital vows work for whatever reason.
If you are planning a divorce in Maine, you might be wondering “How do I protect my money during a divorce?” It’s important to consider every aspect of your finances to ensure a smooth transition. One important but often overlooked asset is the 401(k) retirement plan.
Failing to consider this asset in your divorce plan could end up costing you a sizable portion of your 401(k) balance. Having the right information, though, could help you hold on to more of the retirement investment balance you’ve worked so hard to build.
Who gets marital property in a divorce in Maine?
Where marital property law is concerned, Maine is an “equitable distribution” state. This means that the court will attempt to divide both assets and debts as equitably as possible.
“Equitable” frequently does not mean “equal,” though. Courts in Maine base the distribution of assets and liabilities based on a number of factors, including each spouse’s expenses, earning potential, and available resources.
In a divorce arrangement in which one partner would be responsible for ongoing child-related expenses, for example, the court might attempt to offset those expenses by awarding that person a greater percentage of assets and a lower percentage of debt.
In Maine divorce and finances, marital property includes retirement accounts – including 401(k) accounts, bank checking, and savings balances, pension plans, and owned businesses.
How can you protect your 401(k) in a divorce in Maine?
- Consult your 401(k) plan administrator. There are many legal requirements that must be met in order for funds in your 401(k) account to become anyone else’s property. Your plan’s terms and conditions, as well as Maine law, control much of what can and cannot be done with 401(k) assets.
Your plan administrator will help you determine if your 401(k) assets are vulnerable in a divorce. If it appears that some assets are vulnerable, the plan administrator can help you determine the amount of those assets. This can help you develop a financial plan if some of your 401(k) assets are lost in a divorce.
- Review your prenuptial agreement. Maine has adopted the Uniform Premarital Agreement Act – as long as the prenuptial agreement is in writing, it is considered enforceable.
When it comes to protecting money during Maine divorce proceedings, your prenuptial agreement is highly valuable. Keep in mind, though, that it may only cover contributions before your marriage date – contributions made during your marriage may still be subject to equitable distribution.
- Handle 401(k) divorce cash-outs carefully. If you are going through a divorce, your spouse may seek to take a lump sum from your 401(k) plan to cover their expenses incurred in the divorce, as well as for other purposes.
Likewise, you might be tempted to cash out a portion of your 401(k) balance to cover your own legal, moving, or other expenses created by your divorce.
Typically, 401(k) withdrawals before age 59 ½ involve a 10% penalty – this is retirement money that is gone forever.
If your soon-to-be former spouse is seeking a 401(k) divorce cashout, ask your plan administrator or attorney about a Qualified Domestic Relations Order. This may allow you to avoid the 10% penalty and can specify how the plan pays your spouse.
Taking a cash-out for yourself, on the other hand, will almost certainly involve a 10% penalty. In addition, the money you withdraw from the plan will be treated as taxable income, which means you will owe even more money in the form of federal and state income taxes.
- Educate yourself about your plan and your options. While it would be nice for your attorney or plan administrator to do all of the work, the simple truth is that you need to understand your plan and your options on your own. Familiarizing yourself with plan rules can give you the best leverage possible to keep more of your 401(k) assets.
Managing the Path the Forward
As I mentioned earlier, no one ever gets married with the intention of getting divorced, but life is full of surprises, and the only thing that is constant is change. If you need help planning for a divorce, I’d encourage you to check out this short video title, “How to Prepare for a Divorce in Maine” and learn how a Certified Divorce Financial Analyst can help.