Everyone knows that assets and property end up on the chopping block in a divorce. However, you might be unsure if other valuable assets like retirement plans are also subject to division.
In California, all marital assets, including 401k and other pension plans, will be divided, allowing the non-participant spouse to receive half the value of the retirement account that was accrued throughout the marriage.
However, whatever was accrued prior to the marriage will not be subject to division. For example, if you worked for a total of 1,200 months, 800 of which were during the marriage, then your spouse would be entitled to half of what you earned during those 800 months.
Additionally, dividing a retirement account can potentially be complicated, depending on the wishes of a spouse or how willing each party is to negotiate. Below are some options spouses have for dividing retirement savings in a divorce settlement.
Generally, there are two options for dividing retirement funds during a divorce.
Spouses can agree that the non-participant spouse will receive the payout when the participant spouse does, or both spouses can agree to assign the entire value of the plan to one spouse and make up for it by granting other property to the non-participant spouse.
These options could also be ordered by the court in the event that both parties are unable to reach an agreement.
If you plan to split your retirement savings, it is important to do so properly under a Qualified Domestic Relations Order (QDRO), which will allow the participant spouse to roll financial assets into the other spouse’s qualified plan, tax-free and without penalties.
It is also possible to roll 401k funds into a traditional or Roth IRA, though this might not make sense for those who anticipate being in a higher tax bracket later in life.
It might seem tempting to protect your retirement funds if you know your marriage is headed for divorce, but when you withdraw 401k funds, the court can treat this as though you have taken an advance on your share of the marital property and will likely reimburse your spouse with other marital assets to make up for the withdrawals you made.
Additionally, depending on why you made any withdrawals, the court might hit you with a pre-tax, pre-penalty valuation of the funds.
If you are withdrawing the retirement funds due to financial hardship, it is possible that the court will not have you reimburse your spouse, depending on what you used the funds for.
If you were to use the funds to pay down marital debt or to avoid repossession of marital property, this would be beneficial to both you and your spouse and, therefore, you might not be penalized by the court when the time comes to divide assets and property.
If you are going through a divorce, you will need a skilled legal advocate on your side to help you navigate this complex and emotional process to ensure your interests are protected. At Cage & Miles, our family law attorneys in San Diego are dedicated to assisting clients dissolve their marriage amicably and with as little stress and hardship as possible. You should not have to go through this on your own.
Get started on your case today and contact our law office at (858) 943-2060 to request a consultation.