Do We Pay Taxes if We Divorce and Split the 401(k)?
Divorce turns a marriage into a business transaction.
That’s an unfortunate but true statement.
A big part of that business transaction is splitting assets — including retirement assets.
The most common type of retirement asset we deal with in Utah divorces is money in the 401(k). Almost no one has a pension anymore, so it’s usually a 401(k).
When you split a 401(k) at divorce, this question always comes up: do we pay taxes if we split the 401(k)?
The answer is no, and here’s why: when you split the 401(k), you’re not selling any of the stuff inside the 401(k).
All you’re doing is moving money around.
What happens is the 401(k) company takes money inside one spouse’s 401(k), creates a new account for the other spouse, and moves a percentage of the money in to the new account.
So, when you split the 401(k) during Utah divorces, you end up with two accounts instead of one, but no taxes are paid in the process.
Now, keep in mind that if someone cashes out the stuff from the 401(k) after the money’s been split, that’s a taxable event. You will pay taxes on that sale.
But, those taxes will be paid by the spouse who cashed out, so if you don’t cash anything out of your personal 401(k) account, you won’t pay any taxes.
