Community property states, such as Arizona, view assets acquired during a marital relationship as equally shared between spouses. Because Arizona is a community property state, family law courts generally distribute marital assets equally among spouses upon divorce. Property subject to division upon divorce includes real estate, bank account funds, personal property and retirement accounts such as a 401(k).
401(k) as Community Property
In Arizona, when one spouse opens a 401(k) after marriage, it's presumed to be the property of both spouses; thus, the funds in the 401(k) account will typically be divided equally between spouses during divorce. However, not all 401(k) funds are subject to equal division. For example, if a 401(k) account is started prior to marriage, the funds accrued in the account prior to the marriage are considered the separate property of the spouse who started the account.
Separate Property and 401(k)
Although Arizona recognizes community and separate property, separate property can be converted into community property under certain circumstances. For example, if separate property is commingled with marital assets, it may lose its separate nature and become the equal property of both spouses. Generally, funds deposited in a 401(k) prior to marriage are difficult to commingle with other marital assets. Thus, the premarital portion of a 401(k) account is typically considered the separate property of the spouse who earned it and not subject to division.
Although Arizona is a community property state, courts have discretion as to whether marital assets should be divided equally. Generally, the rule is to divide property in an equitable manner -- this doesn't necessarily result in a 50/50 split. For example, marital assets -- such as 401(k) funds -- may be divided unequally if one spouse had abnormal and excessive expenditures that resulted in waste or somehow attempted to conceal property to prevent it from being divided.
An Arizona court will decide how to divide 401(k) funds based on whether the funds in the account were accrued entirely during marriage. If the court decides all funds in the 401(k) are community property, the court may issue a Qualified Domestic Relations Order to divide the funds. QDROs may involve an immediate distribution of the 401(k) funds or a subsequent distribution, depending on the preferences of the spouses. When a QDRO is issued, funds may be distributed without incurring penalties for early withdrawal.