Should I stop contributing to my 401(k) retirement account since we’re getting divorced in Massachusetts?
If this question has ever crossed your mind, don’t feel like you’re being sneaky. You’re not alone – nearly every person who has a 401(k) account asks this question.
Marital property consists of all property acquired during a marriage, anything acquired with the proceeds of marital property and anything purchased with money earned during the marriage. As such, the portion of your 401(k) that you built before getting married usually will be considered separate property and not subject to division. If you didn’t start with the plan until after your wedding, however, all of it could be marital.
In Massachusetts, marital property continues to accrue after separation, all the way up to the entry of a decree of divorce. Because of this, continuing your 401(k) contributions during the divorce process is not a clear-cut decision.
Enrollment/Plan Periods: Check your plan for defined periods of time in which you can enroll, terminate, or change your contribution amounts.
For personal retirement accounts unrelated to your employment, this may be as simple as changing your deposit amounts online or calling your account manager.
For employer-provided retirement accounts, the process can be more cumbersome, and you may find yourself having to wait for the new period to begin and filling out several forms when it does.
Check your plan, and you may find out the decision is already made for you.
Bankruptcy: If you are contemplating bankruptcy, you may want to continue your contributions. Generally, the more you have set aside in your retirement account the better because your retirement savings are exempt from liquidation in the bankruptcy court.
This means you do not have to use your retirement savings to pay your creditors, and you get to walk away from them with most, if not all, of your retirement savings intact.
Beware, however, that you cannot cheat the system by pouring all of your money into your retirement account; the bankruptcy court may void the additional contributions and give that money to your creditors.
Available Funds: Contributions to your retirement account are generally non-accessible, at least, not without paying taxes and penalties and/or proving a hardship. If you need funds during your divorce to pay temporary bills, such as rent for an apartment or attorney fees, you may want to temporarily discontinue your contributions.
However, every extra dollar you have is an extra dollar you could be paying to your spouse as alimony or child support, or to his or her attorney for fees, and may be counted as income for calculating long-term child support, alimony, or ability to pay bills.
So, if you are going to free up your funds by temporarily discontinuing your retirement contributions, be sure the funds go to a legitimate debt, plan to resume your contributions as soon as practicable (probably after your divorce), and be prepared to explain why the extra boost in your income should not count for long-term calculations.
And what about your spouse’s accounts? The same pros and cons apply to theirs, too. Make sure you are watchful of what your spouse does, so you get what’s due to you.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar either through email or telephone 978-844-4095 to schedule a FREE one hour no obligation consultation to discuss your options and risks regarding your 401(k) contributions.