Divorce can force you to face a whole host of unpleasant truths and realities. One particularly difficult fact is that many of the things for which you worked hard during your marriage are subject to division by your local family court. Among the many property items you may have to share with your soon-to-be-ex is your 401k plan.
Marital Property Division In General
States divide marital property under the laws of either community property (CP) or equitable distribution (ED). The main difference is that CP states divide marital property equally, but in ED states the courts seek a equitable, or fair, division -- which doesn't always equate with an equal division. One thing both systems have in common is that marital property and debt have very little to do with whose name something appears in. This includes your 401k. Whatever you and your employer put in, between date of separation and whatever end date your state uses, will generally be marital property.
Just because you made or earned contributions to your plan during marriage doens't mean the whole thing is marital. The court can only divide the marital portion; the rest is yours. Judges and attorneys put a value on the marital portion by looking at the balance on date of separation (or the date your state uses) and comparing that to the date of marriage balance. They total all the contributions you and your employer made in that time period and apply any increases or decreases in value that may have occurred during your marriage. The value of the marital portion of your 401k will be the total of those contributions and changes in value.
While your ex may be entitled to share in your 401k, it doesn't necessarily follow that she will get a piece of it in divorce. The judge can order a rollover or direct distribution of her half of the marital portion -- provided that the paperwork is done right, this should result in no tax liability for you. Depending upon the nature of your estate, however, the court may have to leave the whole 401k, marital portion and all, in your column in order to compensate you for a bigger share of marital debt or to help balance off another marital asset that your ex is getting.
When you and your ex are negotiating a division of your marital property and debt, keep in mind that the dollar value of your 401k is kind of a fuzzy number. A dollar in your 401k is not the same as a dollar in your pocket, and the reason is this: to get your hands on that 401k dollar, you're going to have to pay taxes on it. As such, if your ex receives a dollar from the joint checking account and your dollar is from the 401k, she's effectively getting more than you because of the difference in tax liability.