Most married couples save for retirement assuming they will still be married when that time comes. Unless a couple has developed a strong prenuptial or postnuptial agreement, this assumption can complicate asset division should they choose to divorce.
Retirement accounts are some of the most essential assets you and your spouse share, but they also present unique complications. It is in your best interest to understand how these types of assets can be divided in your divorce, so you know what to expect of your future finances.
How Divorce May Affect Your Retirement Plans
In California, the assets a spouse acquires during the marriage are automatically granted status as community property, with few exceptions. Unless an asset is covered by another contract that explicitly declares it to be separate property, such as a prenuptial agreement or inheritance, then spouses share joint ownership of it. This includes retirement funds and accounts.
Community property must be divided equally between partners in the event of a divorce. Both parties are owed a 50% share of the overall value of their marital estate. The law permits partners to negotiate to receive assets they would prefer. Still, in the event of a disagreement, judges often default to splitting accounts equally between parties to resolve the dispute.
For instance, if one spouse prefers to keep the liquid assets while the other wants a retirement account of approximately equal value, they could agree to grant full ownership of liquid funds to one person and the retirement account to the other. However, if either party disputes this compromise, a judge may order both asset types split to give both partners their equal share.
Retirement Assets and How They May Be Divided
This division of retirement assets is standard. However, the method by which they are divided varies depending on the type of asset involved. Below are some of the most common assets used in retirement plans and what to expect from their divisions.
Investment Retirement Funds
Investment accounts are some of the most common tools used to save for retirement. These accounts come in many formats, some of the most popular including:
- 401(k)s: 401(k) plans allow employees of private companies to invest for retirement in programs managed by their employers. The employer may match a certain percentage of this investment. The money in these accounts is typically untaxed when placed in the account, then taxed upon withdrawal. The funds may be withdrawn when the account holder is 59.5 years old. Earlier withdrawals may only occur due to hardship and are subject to a 10% early withdrawal penalty as well as taxes.
- 403(b)s: These plans are alternatives to 401(k)s for public and tax-exempt organizations. They function similarly in most cases.
- IRAs: Independent Retirement Accounts (IRAs) are retirement accounts for self-employed people or those whose employers do not offer 401(k)s or 403(b)s. As with these other plans, money is usually not taxed upon deposit but upon withdrawal, and money withdrawn before age 59.5 years of age is subject to withdrawal and tax penalties.
All three types of accounts are also offered as Roth variations, where money is taxed the year it is deposited, not when it is withdrawn. These funds still have early withdrawal penalties but no tax penalties.
These accounts are typically the simplest to divide. If a judge orders you to split these accounts, you can choose to roll them into your own account or withdraw the funds entirely. The funds may roll over to a new account or owner with minimal disruption. There are no penalties as long as the funds remain in a similar investment account. For example, you can roll 401(k) funds into another 401(k), a 403(b), or an IRA, and vice versa. However, if you choose to withdraw the funds, you will face tax and early withdrawal penalties unless you meet the age threshold.
ESOPs and RSUs
Employee Stock Ownership Plans (ESOPs) and Restricted Stock Units (RSUs) are two unique investment-based benefits often used for retirement assets. ESOPs are defined contribution plans that offer employers stock or money purchase opportunities. These plans allow employers to grant workers stock in primarily qualifying employer securities.
Meanwhile, RSUs grant employees a certain number of “restricted” stock units during their employment. These RSUs are often given at the beginning of the employment relationship, but they must vest before gaining value.
Both programs raise questions of future value. An ESOP may become worth nothing if something should happen to the company before the employee is eligible to remove the funds. Similarly, an RSU is worth nothing if the employee leaves the company before it vested. Working with an experienced divorce attorney is critical to determining a fair division of these retirement assets.
While pensions are becoming less common, they still present a valuable resource to employees eligible for them. Pensions offer regular monthly income for retired people based on how long they worked for the pension provider. Careers where pensions remain frequent include education, governmental work, the military, utilities, insurance, and other unionized fields.
Pensions are one of the most complex assets to divide due to the nature of their accrual. Only the portion of a pension earned during a marriage is considered community property. If a couple was married for five years, but the pension earner worked at their job for twenty, only five years of the pension is considered marital property. That means the other spouse owns half of the pension accrued during those five years.
This may take significant effort to calculate. It is recommended that you work with an experienced divorce attorney if you need to divide a pension when dissolving your marriage.
Protect Your Retirement Funds During Your Divorce
You deserve a comfortable and secure retirement. If you believe a divorce is in your future, it is in your best interest to consult with an experienced divorce lawyer like the experts at Madigan & Lewis, LLP. We will work closely with you to help you protect your retirement funds and move forward with your divorce. Schedule your consultation by calling 650-482-8480 or reaching out online to learn more about how our strategic and solution-oriented approach can help you achieve the best possible results in your case.