Retirement Accounts as Community Property
California is a community property state. This means that both spouses own assets acquired during a marriage. Retirement accounts and pensions are considered part of this community property. Consequently, when a couple decides to divorce, these accounts must be divided equitably. Dividing retirement accounts can be tricky, as splitting them in half is not always possible.
Examples of retirement accounts include:
- 401(k) plans
- 403(b) plans
- IRAs, Roth IRAs, and SEP-IRAs
- Employee stock ownership plans
- Family-owned business-funded plans
- Profit-sharing plans
Why Are Retirement Accounts Difficult to Deal with in a Divorce?
Marital property is typically property and assets that are acquired during the marriage. However, people frequently enter marriages with already established retirement accounts. This can create confusion as some people mistakenly believe that this means they are automatically classified as separate property. However, any contributions made during the marriage and any earnings made on those contributions are actually considered community or marital property.
Often, retirement accounts are tied to your employment. For example, you may be contributing to a 401(k) plan offered by your employer. Additionally, many people also set up retirement accounts on their own when their employer doesn't provide them. Consequently, people frequently have a variety of different types of retirement accounts. Sorting through all of your accounts and determining what parts of them are classified as marital property can be a complicated process.
Will a Pre- or Postnuptial Agreement Protect My Retirement Accounts
One of the best ways to protect your retirement accounts is to establish a prenuptial agreement with your spouse before you even get married. Though many people dismiss them because they are unromantic, they can help you and your future spouse prepare for the unknown. A prenuptial agreement doesn't indicate a lack of faith in the marriage but instead recognizes that people and circumstances change over time, and it is always good to be prepared.
With a prenuptial agreement, you and your future spouse can agree that any individual retirement accounts you have will be kept as separate property, even in the event of a divorce. The courts will generally uphold legally valid prenuptial agreements when it comes to dividing retirement accounts. When drafting a prenuptial agreement, you should always work with a skilled attorney. If you are already married, you also have the option of establishing a postnuptial marital agreement.
What You Can Do to Protect Your Retirement
Many people are concerned about their financial stability when going through a divorce. We are often asked what can be done to protect retirement accounts from the divorce process. Unfortunately, if your retirement accounts are considered marital property, they will be subject to property division. However, this doesn't mean that there aren't steps you can take to help safeguard your financial health and ensure that these accounts are divided appropriately and responsibly.
Familiarize Yourself with Your Plans & Their Rules
Because there can be significant tax consequences to withdrawing from a retirement account early, you must familiarize yourself with your retirement accounts and their various rules and regulations. This can help you understand the best way to deal with the account during a divorce.
For example, a Roth IRA can be split under the tax code's "incident to divorce" provision. This provision gives a divorcing couple one year to split the balance of the account without being taxed. Additionally, some plans will require you to file a QDRO (Qualified Domestic Relations Order) to ensure that both parties receive their share of the plan's value. To learn more about QDROs, review our blog on retirement accounts and divorce.
Hire an Experienced Attorney
Because dividing retirement accounts can be so complicated, and because there are long-lasting consequences to how their division is handled, you must work with an experienced lawyer. Your attorney is there to look out for your best interest, and working with someone who understands how retirement accounts are impacted by property division can bring you peace of mind. Not only are they there to answer any questions you have, but they can use their knowledge and experience to guide you.