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Your Solo 401k and Divorce

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Divorces can be messy. You have a lot going on both emotionally and financially. Financially, people often first think about the big items in their everyday lives. Usually the house, the savings accounts, cars, boats, and other large assets. At some point, you become aware that retirement plans are possibly the largest assets of all. When it comes to your Solo 401k and divorce, this might be your biggest concern and biggest asset of all.

If divorce is a situation you are facing, your first question might be how to hold on to your Solo 401k? That’s a very good question. However, you should also ask what happens if you receive part or all of your spouse’s 401k? Here we address both sides of the question.

In fact, it’s common for people to have more than one retirement account. You and/or your spouse may have accounts with previous employers plus a self-directed Solo 401k. A good place to begin is by making sure you aware of all the retirement accounts.

How Your Solo 401k Relates to a Divorce

For the most part, all types of 401ks are treated exactly the same in a divorce. A Solo 401k is treated the same as a 401k managed by an employer. One thing that you may need to consider is when you and your spouse jointly own a Solo 401k. There is a distinction to the “one-participant” requirement when an owner-only business is actually owned by both husband and wife. Even then, each has their own participant sub-account within the Solo 401k plan. For help with this distinction, please contact us.

Each spouse generally maintains a separate bank checking or brokerage account within the Solo 401k. It’s the same as if you both work for the Coca-Cola Company and have a 401k in his or her names. At the end of the day, both accounts go into the joint asset pool to be awarded according to the QDRO (see below).

Getting Help From Your CPA

Each divorce has unique situations. These situations may have state laws that apply to dividing assets. Possibly the Solo 401k account was established by one of the spouses before the marriage. The Nabers Group recommends using your CPA to help determine the actual value of the Solo 401k. If you don’t have a CPA to assist you, please reach out to us so we can provide a list of CPAs familiar with the Solo 401k.

Regardless of the type of account involved, you may not be able to take out any cash before your spouse reaches retirement age.

When it comes to your Solo 401k and divorce, there is really no difference from any other 401k retirement account. Another scenario is one spouse has an employer retirement account and the other has a Solo 401k. Or one spouse doesn’t have a retirement account at all. In the end, all accounts pool together to be distributed by the QDRO.

What QDRO Means For the Solo 401k and Divorce

QDRO stands for “Qualified Domestic Relations Order.” It’s a court order for how a retirement plan affects child support, alimony, or marital property rights. This applies to a spouse, former spouse, child, or other dependent. A QDRO is only for private pension plans falling under the Employee Retirement Income Security Act (ERISA). There are similar court orders for military retirement pay and government plans. These include federal, state, county, and municipal civil employees.

Preferably, both spouses agree to the asset split before the divorce decree is final. The QDRO is only one part of the total assets. However, a Solo 401k administrator (or other plan administrator) can only distribute the 401k account based on a court ordered QDRO.

The split isn’t always equal. Generally, the only funds being split are those added while you were married. If the Solo 401k existed prior to the marriage, the split probably won’t be equal.

Solutions to Consider

You should know the asset split doesn’t have to divide the Solo 401k down the middle. You may want to consider substituting other assets of similar value. This can keep the Solo 401k whole. An example is the husband accepting the house and boat in exchange for the Solo 401k. There are several reasons this is the good answer to consider.

If the husband has another retirement account managed by his employer, he can keep it and continue adding to it. At the same time, the self-employed wife keeps the entire Solo 401k. Both continue making contributions and financial gains to their own accounts without disruption.


Each keeping their own retirement account solves problems when assets are hard to divide. This is often the case when a Solo 401k owns rental houses or other tangible assets. These assets could be very difficult to divide. The most likely solution is selling the rental houses or tangible asset for cash. Cash is the easiest asset to divide. Rushing the sale (or selling during a down market) doesn’t benefit either spouse. Nor does either one need another big headache during this time of emotional and financial stress.

A Solo 401k is really just another dollar amount to be divided. This makes solutions possible. Maybe the value of the house is $30,000 less than the Solo 401k but a child’s college account needs funding. A solution is the wife keeps full ownership of the Solo 401k and the husband keeps the house. To keep it equal, she funds the college account at a rate 25% higher than future Solo 401k payments.

The combination of a Solo 401k and divorce might actually be the main solution. You could take advantage of an important benefit the Solo 401k offers. The answer might be adding some more cash to the QDRO. Each Solo 401k by Nabers Group automatically includes a participant loan. You can take a personal line of credit of up to $50,000 or 50% of the account value. This could be part or the entire solution to an easier divorce settlement.

Know how your Solo 401k can be affected in a divorce
Know how your Solo 401k can be affected in a divorce

What Else You Need to Know

There are tax implications and early withdrawal fees to consider during a Solo 401k and divorce. When an account cashes out or changes ownership, doing it properly avoids paying taxes and fees. The good news is you have options for a Solo 401k. Most options come under the IRS Exceptions to Tax on Early Distributions under Domestic Relations 72(t)(2)(C).

You do this with a direct rollover, indirect rollover, or lump sum distribution. With a direct rollover, the person receiving the 401k funds never touches the money. An administrator directly rolls the funds from one retirement account to the other spouse’s retirement account.

With an indirect rollover, the administrator of one account writes a check to the other spouse. The spouse with the check has to deposit the money into another retirement account within 60 days. The 60 days requirement is critical to avoiding taxes and early withdrawal fees.

Retirement Plan Distributions

A lump sum distribution is seldom preferred. However, the spouse receiving the money does have more options. It’s very important to understand that almost any option causes IRS income taxes to become due. The administrator withholds 20% when the distribution is made. The options available involve how much of the funds are deposited into the other spouse’s retirement account within 60 days. It’s possible that part of the money (after withholding) is used for personal reasons and part goes into a retirement account. The amount not deposited in a retirement account is taxable. In a divorce, the 10% early withdrawal penalty doesn’t generally apply, even if before the age of 59 ½. However, the money is subject to income taxes regardless of the age.

Since the best choice is moving the money to a qualified retirement account, this can be the right time to open a Solo 401k.

It’s always important to consult with attorneys and tax professionals before making any decisions about the division of retirement accounts during a divorce. Also, always be sure you are using the most current information from the IRS.

No one cares about your money more than you do – nor should they!

Have questions about your Solo 401k and divorce? Solo 401K experts at Nabers Group will help you get your retirement funds into your control, where they belong. Contact us here.

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