Dividing a 401k in a South Carolina Divorce case
In a South Carolina Divorce case all property acquired during the marriage is subject to equitable division. The South Carolina Equitable Apportionment Act sets forth the requirements a judge must follow when dividing marital assets.
The South Carolina Equitable Apportionment Act states that all property acquired during the marriage is considered marital property, regardless of how it is titled. It also specifically exempts property acquired before the marriage and “any increase in value” of pre-marital property that may have occurred during the marriage. So how should a South Carolina Divorce Lawyer divide a 401k that was partially acquired before the marriage but also paid into during the marriage?
A 401(k) is marital property just like the living room sofa. It is also a complicated tax deferred retirement plan that will often have both marital and non marital components. 401ks are made up of a variety of smaller investments similar to a mutual fund. There are three primary ways to divide a 401k that has both marital and non marital components:
- The first is to simply deduct the pre-marital component and divide the remaining funds between the parties. This method may work with accounts that have a very modest pre-marital balance and a marriage of short duration. The cost of valuing the increase in the pre-marital portion may be greater than the benefit received.
- The second method is to estimate the average rate of growth of the entire account and apply this rate of growth to the pre-marital portion. If a 401(K) has a balance of $120,000 and holds $20,000 of pre-marital funds, the average growth rate of the fund during the marriage is applied to the $20,000 and this entire amount is then deducted from the overall balance.
- The most accurate way to divide a 401k is to calculate the rate of growth of each individual holding within the 401k and then back out each pre-marital portion of each holding. If you like paying CPA’s this method is for you.
In order to avoid taxes and penalties, a South Carolina Divorce Lawyer will draft a “Qualified Domestic Relations Order”. This is a separate order done at the time of divorce which will be sent to the retirement plan setting forth the specific amount of money to be awarded to the spouse.
It is also very important when dividing a 401k that the Qualified Domestic Relations Order specify that the account be divided on a “pro rata” basis from all accounts and sub accounts within the plan. This will avoid one party from getting all the “good” holdings and leaving the other party with poorly performing holdings.