Faith Morrow
Dividing 401(k) investments can be a complex process, especially in the context of a divorce. The state where you live will play a significant role in determining how your marital assets are split. In a community property state, the court will typically divide assets 50/50. However, in an equitable distribution state, the court may divide assets in a manner it deems fair. It's important to consider the cost basis when dividing investments equally to ensure a fair distribution. Additionally, factors such as future growth prospects, risk tolerance, financial needs, and investment timeframes should be taken into account when making these decisions.
| Characteristics | Values |
|---|---|
| Divorce | In a community property state, the court will split your marital assets 50/50. In an equitable distribution state, the court will divide up your assets in what it views as an equitable manner, which may or may not be 50/50. One spouse can transfer all or part of their IRA to the other spouse’s IRA without either of them incurring taxes. A divorced spouse can collect Social Security benefits based on their ex’s earnings record. The amount that the divorced spouse receives will not have any effect on the other spouse’s benefit. If you and your spouse divorce, your 401(k) could be divided up as part of the financial settlement. Assuming your investment has appreciated, you will end up with less than the sale price—because you have to pay taxes on any gains over the cost basis. The cost basis is divided equally as well. |
| Allocation | Allocate half of your contributions to each fund, as opposed to just picking one. |
| Risk | Future prospects for growth or income, your own tolerance for investment risk, your financial needs, and your timeframe for investing. |
What You'll Learn
Divorce and assets
If you and your spouse decide to divorce, your 401(k) will be divided as part of the financial settlement. In a community property state, the court will split your marital assets 50/50. In an equitable distribution state, the court will divide up your assets in what it views as an equitable manner, which may or may not be 50/50.
The money that you contributed to your account before you were married isn’t considered a marital asset. In some cases, a divorced spouse can collect Social Security benefits based on their ex’s earnings record. To qualify, the applicant must currently be unmarried and at least age 62, and the marriage must have lasted 10 years or more.
If you're dividing investments equally, it's important that the cost basis is divided equally as well. Your financial institution or Fidelity representative should be able to help with that.
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Future prospects for growth or income
When dividing 401k investments, it is important to consider the future prospects for growth or income, your tolerance for investment risk, your financial needs, and your timeframe for investing.
One strategy is to allocate half of your contributions to each fund, rather than just picking one. This approach takes into account the expenses on your funds, which are a consistent predictor of performance going forward.
Another important consideration is the cost basis of your investments. If you are dividing investments equally, it is crucial that the cost basis is also divided equally. This can be done with the help of your financial institution or a Fidelity representative.
Additionally, if you are divorcing, your 401k will likely be divided up as part of the financial settlement. In this case, it is important to consider the state where you live, as the court will split your marital assets 50/50 in a community property state, but may divide them in an equitable manner in an equitable distribution state.
Finally, it is important to remember that taxes will be applied to any gains over the cost basis, so it is crucial to understand your tax rate, holding period, and cost basis before making any decisions.
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Risk tolerance
When dividing 401k investments, risk tolerance is an important factor to consider. Risk tolerance is the degree of uncertainty or risk that an investor is willing to take in exchange for the potential to achieve returns.
It is important to assess your risk tolerance before making any investment decisions. This can be done by considering your financial goals, time horizon, and risk tolerance level. Your risk tolerance level will determine the type of investments you make and how you allocate your 401k investments.
If you have a high risk tolerance, you may be willing to take on more risk in exchange for higher returns. This may mean investing in more aggressive investments such as stocks or mutual funds. If you have a low risk tolerance, you may prefer to invest in less risky investments such as bonds or fixed-income securities.
It is also important to diversify your investments to reduce risk. This can be done by investing in a variety of asset classes such as stocks, bonds, and real estate. Diversification can help to reduce the impact of any one investment on your overall portfolio.
Finally, it is important to review your investments regularly to ensure that they are still aligned with your risk tolerance and financial goals. This can help you to make adjustments to your portfolio as needed and ensure that you are on track to meet your financial goals.
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Financial needs
When dividing 401k investments, it is important to consider your financial needs. Divorce is a common reason for splitting 401k investments, and the state you live in will determine how the assets are divided. In a community property state, the court will split the assets 50/50. In an equitable distribution state, the court will divide the assets in what it views as an equitable manner.
When dividing investments equally, it is important that the cost basis is divided equally as well. This can be done with the help of your financial institution or Fidelity representative. Other important things to consider are the future prospects for growth or income, your tolerance for investment risk, and your timeframe for investing.
It is also important to consider the tax implications of dividing 401k investments. If you are divorcing, you may be able to transfer all or part of your IRA to your spouse's IRA without incurring taxes. This is often referred to as a "transfer of account incident to divorce". However, if you are dividing investments equally, you will need to pay taxes on any gains over the cost basis. The amount of tax you will owe will depend on your tax rate, holding period, and cost basis.
In addition to considering your financial needs, it is also important to consider the expenses on your funds. The evidence is clear that expenses are one of the most consistent predictors of performance going forward. Therefore, it is important to evaluate the expenses on your funds and make sure they are aligned with your financial goals.
Finally, it is important to consult with a financial advisor to ensure that you are making the best decisions for your 401k investments. A financial advisor can help you evaluate your financial needs and develop a plan to meet those needs. They can also help you navigate the tax implications of dividing 401k investments and make sure you are taking advantage of any tax benefits that may be available to you.
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Timeframe for investing
When dividing 401k investments, it is important to consider the timeframe for investing, as well as the future prospects for growth or income, your tolerance for investment risk, your financial needs, and taxes.
The timeframe for investing is important because it will determine how much you can invest and how often you will need to rebalance your portfolio. If you are investing for a short-term goal, such as a down payment on a house, you may want to invest more aggressively. However, if you are investing for a long-term goal, such as retirement, you may want to invest more conservatively.
The future prospects for growth or income are also important to consider when dividing 401k investments. If you are investing in a market that is expected to grow, you may want to invest more in that market. However, if you are investing in a market that is expected to decline, you may want to invest less in that market.
Your tolerance for investment risk is another important factor to consider. If you are comfortable with taking on more risk, you may want to invest in more volatile markets. However, if you are not comfortable with taking on more risk, you may want to invest in less volatile markets.
Your financial needs are also important to consider when dividing 401k investments. If you are investing to save for a specific goal, such as a child's education, you may want to invest in a way that will help you reach that goal. However, if you are investing to save for a more general goal, such as retirement, you may want to invest in a way that will help you reach that goal as well.
Finally, it is important to consider taxes when dividing 401k investments. If you are investing in a tax-advantaged account, such as a 401k, you may want to invest in a way that will help you take advantage of the tax benefits. However, if you are investing in a taxable account, you may want to invest in a way that will help you minimize your tax liability.
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Frequently asked questions
In a divorce, the 401(k) investments will be divided as part of the financial settlement. The state where you live will come into play, especially if you leave it to a judge to decide how to split up your assets. In a community property state, the court will split your marital assets 50/50. In an equitable distribution state, the court will divide up your assets in what it views as an equitable manner, which may or may not be 50/50.
The money that you contributed to your account before you were married isn’t considered a marital asset.
One spouse can transfer all or part of their IRA to the other spouse’s IRA without either of them incurring taxes. This is often referred to as a “transfer of account incident to divorce.”
Depending on what else you and your spouse own, it can sometimes be easier to leave your retirement plans alone and divide up other assets instead.
