When couples are divorcing, one of the first things they will be tasked with is taking stock of all their assets so that the process of equitably dividing marital assets can begin. What they might not realize, is that not only are their retirement accounts such as IRAs and 401(k)s at issue, but so are any defined contribution or pension plans belonging to either party.
The most significant difference between a 401(k) plan and a traditional pension plan is the distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans,such as pensions, guarantee a given amount of monthly income in retirement and place the investment and longevity risk on the plan provider. Defined contribution plans, such as 401(k)s, set the investment and longevity risk on individual employees, asking them to choose their retirement investments with no guaranteed minimum or maximum benefits. Employees assume the risk of both not investing well and outliving their savings.
Whether you or your spouse were a part of a pension plan or a 401(k) retirement savings plan, any amount contributed to the plan by you, your spouse, or your employer during your marriage will be subject to equitable division. This applies even when you have no rights to your pension until you reach retirement age. It also applies to any employer contributions to your retirement account that have not yet vested. Any contributions made prior to marriage or after the marriage ended will remain your individual property and are not subject to equitable division in your divorce. Something of note, to ease worried minds, is that even though you usually may not withdraw from a retirement account until you have reached retirement age without paying taxes and penalties when dividing a retirement account in divorce, the law permits you to split the account without incurring any penalties or any taxes becoming due.