The end of a marriage means more than the end of a romantic relationship. It also means the end of a financial partnership. The asset division portion of the divorce is often complex, and one of the more difficult assets to split are retirement accounts.
Three specific questions that can help guide this process when starting a conversation about splitting retirement assets during divorce include the following.
#1: How old were you at the time of the marriage?
Those who are married later in life may take steps to protect the interests accumulated prior to the marriage. In some cases, it may be possible to maintain separate retirement accounts. This is not easily done, especially in a community property state like California. California state law generally splits assets accumulated during the marriage equally between both parties. This often includes growth in the retirement account during the marriage.
Those who wish to keep the asset separate may be able to use other legal tools, like a prenuptial agreement, to set the retirement account aside as separate property, not subject to division during divorce.
#2: How old are you at the time of the divorce?
Those who were married while in their twenties or thirties and get a divorce later in life often have accumulated more assets compared to their younger counterparts. These assets can include retirement accounts that have gone through decades of growth. It is important to carefully consider the split of these assets for two reasons.
- Substantial asset. First, as already noted, the significant growth and fact that the asset is likely one of the larger in your estate.
- Growth prospects. Second, it is important to remember that these assets take time to grow. We cannot make up for those decades when the asset was growing.
As a result, it is important to properly account for the value of the retirement assets during property division discussions.
#3: What types of retirement assets are in the marital estate?
The type of retirement account will impact how it is divided. Certain assets require specific paperwork. The law generally requires use of a qualified domestic relations order (QDRO) to split a private retirement plan and a domestic relations order (DRO) to split state or federal public retirement plans. The divorce paperwork is not enough. Without a QDRO or DRO, the retirement account provider will not make payments to the non-listed ex, also known as the alternate payee.
Final thoughts to help guide the division of retirement accounts.
When splitting retirement assets, having the right paperwork in order is just one consideration. It is also important to look at the potential tax implications of changing or withdrawing from accounts.
With these points in mind, you can start taking steps to better ensure a smooth transition and fair split while mitigating the risk of surprises after the divorce is finalized. These steps can include getting a summary plan description for all retirement assets as well as valuations. Asset division discussions are often more efficient when accurate valuations are available. This can help to guide discussions about the use of similar assets in exchange for retirement accounts, such as business interests or real estate.