Many people headed into a divorce think “I’ll get to keep my retirement accounts.” It is not that simple, though. Here is some background on dividing retirement assets in a divorce.
Basics of property division at divorce
A divorce usually will not be granted without splitting up all the couple’s assets. This is typically called “property division,” and it works differently depending on what state you are in. There are two main types of marital property systems. The first is called equitable division. In equitable division state, which includes most states in the country, property during marriage is owned by whichever spouse has a title. For example, if a husband only has his name on a deed then he owns the house himself.
At divorce in an equitable division state, however, all the marital assets, meaning assets the spouses gained during the marriage, will be added up into one big pot. That pot will then be split “equitably.” A judge is usually given a list of factors to consider, such as the relative wealth of each spouse and their future earning potential. For example, if a young doctor and his homemaker wife are getting divorced then the judge may give more property to the wife because she presumably helped him through medical school and now he is positioned to earn more money in the future.
A handful of mostly western states, like California, have s system called “community property.” In a community property state, everything each spouse earns during the marriage is jointly-owned community property. For example, if a wife buys a car and only puts her name on it, it will actually be jointly owned by both spouses. At divorce, this community property is generally divided equally between the spouses.
Applying property division rules to retirement
Splitting up property in a divorce can seem easy at first. For example, perhaps the couple will divide up the funds in their bank account, and then sell their house and split the proceeds. Or maybe one spouse will keep all the cash but then the other spouse will get the house. Retirement can get way more complicated.
For one thing, retirement assets are hard to value. Think of a pension plan. A pension makes certain payments to the beneficiary generally based on calculations of their salary and how long they have worked. These payments rely on the life expectancy of the beneficiary, because a sick person is likely to collect far less of a pension, but a judge may or may not want to wade into that. Plus the first few years of work on a pension may be nearly worthless, so the pension might be worth little at divorce but can be quite valuable if the person continues on for many more years at the same job.
A 401(k) or IRA poses similar problems. These accounts are tax deferred, so the current balance is not necessarily the same as what they will be worth some day in the future if they are carefully drawn down in retirement. Some couples have most of their net worth in these tax-deferred accounts, and that can be a challenge because the accounts cannot be drawn down before retirement without incurring penalties. If you have large, complicated retirement assets you probably want to call in an accountant or lawyer to help with your divorce.