Ending a marriage is never easy. It’s even more complicated if you’ve been planning for retirement since California law makes retirement funds hard to divide fairly.
California is a community property state, which means that all assets a couple acquires during their marriage are to be divided 50/50 in a divorce. While couples are allowed to negotiate with each other, either party can object to the division and bring the matter to court. If that happens, the judge is obliged to divide assets as close to equally as possible, retirement funds included.
This can be difficult for many kinds of retirement accounts. Still, doing your research can help you understand your options. Here’s what you need to know about the different types of accounts and how you can approach them to get the most equitable split possible.
The 5 Main Types of Retirement Funds
Before deciding how you want to split your retirement funds in a divorce, you need to understand what kind of funds you have. Various accounts and programs have to be handled in different ways to successfully and fairly divide them. There are five primary kinds of retirement funds:
- Individual Retirement Account (IRA): These personally-funded retirement investment accounts are funded by pretax income with a limit of $6000 each year. Money is taxed upon withdrawal.
- 401(k): A collaborative investment plan with an employer where employers and employees both contribute to the account. Taxes are deferred, and employees can contribute up to $20,500 in 2022. 401(k)s can also be structured like Roth IRAs, though, in which funds are taxed the year they are deposited and not taxed upon withdrawal.
- 403(b): Similar to 401(k) plans, 403(b)s are available to tax-exempt organizations and have a contribution limit of $20,500 in 2022.
- Pensions: An employer-sponsored plan where the employer calculates how much the employee receives in retirement based on their age, salary, and employment length. Money comes from the employer’s own pension fund, and the amount isn’t determined until the employee retires.
- Social Security: Government-funded benefits that are paid through income taxes. The government calculates Social Security benefits based on age, tax contributions during the career, and when you first claimed Social Security.
How to Split Different Retirement Funds in Your Divorce
So, how can you split these different kinds of retirement funds? There are a few main strategies for different types of funds. Here’s how most divorcing couples approach various funds and the biggest concerns for each kind.
Splitting Individual Retirement Accounts
Individually owned accounts are usually the simplest kinds of funds to split. Since there are no complications from other parties, an IRA or Roth IRA can be divided similarly to any other investment account. The account is divisible, and half of its contents can be transferred into a different account after the divorce. This is as simple as contacting the brokerage firm and informing them of the split and the account to which the funds should be directed.
There’s are potential characterization issues with dividing IRAs. If one person already owned an IRA before their marriage, then continued to contribute to it after the wedding, only part of that IRA may be community property. In that case, the account is typically not split down the middle. Instead, the original owner should reach out to an experienced divorce attorney to determine how much of the current account value is community property versus separate property. This is the amount that the court will split between the two spouses.
Splitting Employer-Funded Retirement Accounts
Employer-funded accounts make things slightly harder. Since a 401(k) or 403(b) program is not directly overseen by the employee, dividing the account takes more work.
In general, the actual account value can be split like an IRA. As with an IRA, 401(k)s and 403(b)s begun after the couple married are considered community property. In that case, the account can be split down the middle. Otherwise, the employee has to work with a professional to determine how much of the fund is a community asset to be split verses separate property of the employee spouse.
Once that amount has been found, it’s time to split the account. The court will create a “qualified domestic relations order” (QDRO) that explains how things should be split. The couple has to contact the plan administrator and give them the QDRO. The administrator will then work with the non-employee spouse to transfer their share of the funds. The receiving party can have the funds transferred to their current employer’s 401(k) program, an IRA, or even their personal bank account if they are willing to accept the tax penalties for early fund withdrawal.
Pensions are the most complicated plans of all. This is because a pension doesn’t have a fixed value. Unlike other accounts, a pension’s value is determined after the person stops working for the pensioning organization. That means there’s nothing to be split other than the right to receive the pension.
In some cases, that’s exactly what happens. The court determines what portion of a pension the non-pensioned spouse is eligible to receive and writes a calculation to be used by the pensioning organization.
In others, the pension is used as a bargaining chip. The judge grants the pension entirely to the employee who earned it but gives the other spouse all of a different asset. For instance, one person would get the pension, and the other may get the family home or an IRA account. The best solution depends on the anticipated value of the pension. Counsel may retain an expert to assist you in valuing your pension plan.
Splitting Social Security
Finally, Social Security is an outlier because it’s not actually divided. It’s not handled in court. A divorced person may simply claim benefits based on their ex-spouse’s income if they meet these criteria:
- They were married to the other person for at least 10 years
- They are currently unmarried
- They are at least 62 years old
- They aren’t eligible to receive greater benefits from their own work record
If all of that is true for you, you can file for your ex-spouse’s Social Security benefits. This will not affect their benefits, either. The money is essentially penalty-free retirement funds for you.
Handle Retirement Fund Division the Right Way
You’re already ahead of the game if you’ve been preparing for retirement. Keep yourself on track by making sure your retirement accounts and pension are split as fairly as possible in your divorce. The experienced attorneys at Flicker, Kerin, Kruger & Bissada, LLP, are ready to help you navigate the complications of dividing assets during your split. Schedule your consultation today to get the process started.