Retirement Accounts & Divorce
Retirement accounts may be in one spouse’s name, but in California, what’s earned during the marriage is typically shared. Dividing 401(k)s, pensions, and other retirement assets fairly—and without costly penalties—requires careful planning. Knowing your rights and taking the right steps can help protect your financial future long after the divorce is final.
Your future deserves more than a guess. Dividing retirement assets is about more than splitting numbers—it’s about securing your financial stability for years to come.
Like other kinds of assets accumulated during a marriage, in California, retirement accounts are generally considered community property, belonging equally to both spouses. Contributions made to those accounts after the date of marriage and before separation are marital property, regardless of which individual’s name is on the account, unless they are specifically excluded by a prenuptial or postnuptial agreement. Claiming your fair share of defined contribution plans, such as 401(k)s or defined benefit plans such as pensions, can be an essential step in not only ensuring a just division of shared property but also securing your financial future.
However, dividing retirement accounts often requires extra steps to avoid triggering unintended tax consequences or early withdrawal penalties. Those costs can significantly diminish the value of the portion you receive, so it is important to understand and follow the correct procedures.
How Retirement Accounts Are Divided in Divorce
As noted above, the portion of retirement funds acquired during a marriage is subject to division in divorce in California. This means the first step in determining how such accounts should be split is to get a complete picture of the accounts and their value by completing a Schedule of Assets and Debts. The attorneys on both sides will review this information to make sure all accounts are in order and to understand the couple’s financial situation.
How a couple chooses to divide their retirement accounts depends on the type and value of those accounts and their individual circumstances. It is not required that each account under consideration be split; if, for example, the couple had equivalent retirement savings in self-funded IRAs or Roth IRAs, they might choose to craft a settlement agreement that leaves each with full ownership of their own accounts rather than transferring funds. In situations where a higher earner has more significant employment-related retirement assets, such as a 401(k), 403(b), or pension plan, then it can be necessary to divide those accounts or trade them for an equivalent value of other marital assets. These determinations should be made with the advice of legal and financial professionals. Of course, if the couple cannot come to an agreement, the court will decide how the accounts should be divided.
Legal Steps for Dividing Retirement Funds
The proper legal procedures to split retirement funds depend on the type of account, but in most cases, transfers can be accomplished tax-free. Division of an IRA can be treated as a transfer incident to divorce, but to avoid paying tax, it must be detailed in the property settlement agreement or judgment, and the funds must be transferred directly into another IRA belonging to the recipient spouse. After the court has approved the split, the paperwork required by the financial institution holding the account will have to be filed, along with documentation of the court’s order. Otherwise, the transfer could be treated as a distribution, subject to federal and state income taxes and possibly early withdrawal penalties if it is taken before age 59½.
For retirement plans covered by the Employment Retirement Income Security Act (ERISA), including 401(k)s, 403(b)s, traditional pensions, and others, a Qualified Domestic Relations Order (QDRO) is required to transfer a portion of the plan’s value to the nonparticipating spouse. This document, drawn up by their attorney, must contain specific information and be approved by the court and the plan administrator to be valid. Transfers made with a QDRO are typically not subject to the 10% early withdrawal penalty and may also be tax-free if the funds are rolled over into an IRA or another qualified account. However, if the spouse receiving the transfer takes a cash withdrawal, they will be subject to federal and state income taxes on that money.
The consequences of mishandling the division of retirement accounts in divorce can be extremely damaging to your long-term financial outlook. It is always best to obtain expert legal and financial advice to protect your financial interests and avoid procedural missteps.
The Importance of Updating Beneficiaries
When couples are married, it is common for each to designate the other as their beneficiary on their retirement accounts to take care of their family in the event of an untimely death. Individually owned accounts like 401(k)s and IRAs are left outside of any trust a couple might have set up, and a beneficiary designation effectively keeps the account out of probate. Unfortunately, that designation also usually overrides any conflicting directions in estate planning documents such as a will or a trust, so it must be kept current with the account owner’s wishes.
Leaving an outdated beneficiary designation after divorce could result in your ex receiving retirement funds you intended to go to your children, a new spouse, or other family members. Therefore, review beneficiary designations on your retirement accounts and change them, if necessary, as soon as the divorce has been finalized.
Expert Legal Representation for Complex Property Division in Silicon Valley
Retirement accounts can form a significant portion of the assets a couple has accumulated during their marriage, and unraveling what should belong to whom can be a complex and contentious process. The experienced family law attorneys at Hoover Krepelka can provide the guidance you need to obtain a fair settlement of retirement funds and ensure none of its value is lost to avoidable taxes and penalties. To schedule your consultation, fill out the form below today.
