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Community Property Law Impacts 401(k) Assets

In a divorce in Arizona, each spouse is entitled to an equal split of the financial and property assets acquired during the marriage. The state is among the nine that apply community property law to all assets acquired during a marriage. That means each spouse is an equal owner of all marital assets and that property division is split 50/50.

How community law affects your 401(k)

In an Arizona divorce, any funds placed into your 401(k) during the marriage is subject to an equal split. However, any money placed in the account prior to the marriage belongs to you. The same goes for any retirement accounts your spouse might have. Once you both file for the initial divorce proceeding, assets acquired afterward are not subject to the equal split.

Plan administrator involvement needed

Because one or more 401(k) accounts will be distributed to the former spouse, the administrator of each affected account will need to be notified. The administrator will ensure funds are distributed as required by the eventual divorce order while abiding all state and federal laws. Some distributions might trigger taxation that affects their value, which could result in divorcing spouses negotiating final divisions.

Agreements can keep accounts whole

When each spouse has 401(k) accounts of similar value, it makes no sense to perform partial distributions. Instead, spouses can agree to keep respective accounts of generally equal value and only divide those that contain significantly different amounts. The more two soon-to-be ex-spouses can minimize the fees and taxes, the more affordable the divorce becomes. Negotiation also helps to minimize emotional and financial consequences.

An experienced family law attorney in Phoenix can help to review your 401(k) accounts and explain your options. While working with an attorney, you can streamline the divorce process and minimize taxes.