How to handle retirement resources during divorce
Community property rules can affect asset division during divorce proceedings. Spouses need to identify their shared assets and financial obligations. They have to work out arrangements that allow them to share their debts and assets with one another in an appropriate manner.
If the marriage has lasted for multiple years or if either spouse has a successful career, then there could be retirement savings or pension benefits to consider. Not only can retirement resources represent a significant portion of the overall marital estate, but they can also have a major impact on the financial stability of the spouses after the divorce.
How can people address pensions and retirement accounts during divorce proceedings?
Determining how much is marital
Typically, balances accrued prior to marriage are separate property that spouses do not have to share. The spouses may have also imposed certain rules about retirement savings or pensions in a prenuptial agreement. Without a pre-existing arrangement, any contributions made during the marriage, including employer contributions, are likely subject to division.
Planning to address the resources
As spouses negotiate or prepare for litigation, they have to decide how to address retirement savings or pensions. In some cases, directly dividing an account is the simplest solution. Other times, spouses can use marital debts and other marital property to balance decisions related to pensions and retirement accounts.
Spouses may need to discuss the matter carefully to reach an arrangement that they both feel is fair and appropriate. If the spouses contributed to a Roth IRA, direct withdrawals from the account can be an option.
In scenarios involving tax-deferred retirement savings accounts, such as 401k, the spouses may need to arrange to have an attorney draft a qualified domestic relations order (QDRO) after the courts approve a final property division settlement. A QDRO can prevent tax consequences and can help spouses avoid the 10% penalty often imposed on early withdrawals from retirement savings accounts.
A pension might be divisible depending on how an employer structured it. If it is not, then the recipient spouse could provide alimony or spousal support to balance out what they receive as pension benefits. It is even possible to leave a pension or retirement account untouched and to simply factor its value into other parts of the property division process.
Each of these solutions offers benefits and drawbacks. Spouses have the option of setting their own terms based on what they believe is appropriate. If they cannot agree, then they may litigate and ask a family law judge to decide how to address retirement accounts, pensions and other marital resources.
Understanding how to address high-value marital resources can be important for those preparing for complex divorce proceedings. Seeking legal guidance is a good way to get started.
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