Retirement Accounts Are Property
Retirement accounts are considered property in a divorce. They may include accounts through an employer, government agency, union, military service, private plan, or individual retirement arrangement.
Retirement assets can be community property, separate property, or a combination of both.
The fact that only one spouse's name is on the retirement account does not necessarily mean the account is entirely separate property. If retirement benefits were earned during marriage, the community may have an interest.
Retirement contributions and benefits earned during the marriage are generally community property. For example, if one spouse contributed to a 401(k) during the marriage, the portion of the account earned during the marriage may be community property. If one spouse earned pension service credit during the marriage, that portion of the pension may also be community property. The community interest usually depends on when the benefits were earned, not simply when they are paid.
Common Types of Retirement Accounts
Retirement accounts in divorce may include many different plan types. Different types of retirement benefits may require different language, procedures, and division documents.
- 401(k) accounts
- 403(b) accounts
- 457 plans
- IRAs
- Roth IRAs
- SEP IRAs
- SIMPLE IRAs
- pensions
- CalPERS benefits
- CalSTRS benefits
- union pensions
- military retirement
- federal retirement benefits
- profit-sharing plans
- employee stock ownership plans
- deferred compensation plans
Separate Property and Retirement Accounts
A retirement account may also include separate property.
Separate property may include retirement contributions or benefits earned before marriage, contributions or benefits earned after separation, growth on separate property portions, or retirement assets received by inheritance or another separate source.
Many retirement accounts have both community and separate property components, especially when one spouse worked for the same employer before, during, and after the marriage.
- retirement contributions made before marriage
- retirement benefits earned before marriage
- contributions made after separation
- benefits earned after separation
- growth on separate property portions
- retirement assets received by inheritance or other separate source
Defined Contribution Plans
A defined contribution plan is an account-based retirement plan. Examples include 401(k), 403(b), 457, and similar plans.
These accounts usually have a balance that can be reviewed through statements. The community portion may depend on contributions, employer matching, investment gains, loans, and the date of marriage and separation.
A defined contribution account may be divided by percentage, dollar amount, or another method approved by the retirement plan and court order.
Pensions and Defined Benefit Plans
A pension is different from an account with a simple balance. A pension usually provides a future monthly benefit based on employment, service credit, age, salary, and plan rules.
Pensions can be more complicated to divide because the value may not be obvious from a regular account statement. The community interest may be based on the portion of service credit earned during marriage.
Survivor benefits can be important in pension division. A pension may provide payments only during the employee spouse's lifetime unless survivor benefits are elected or awarded. If survivor benefits are not addressed, the non-employee spouse may lose expected benefits if the employee spouse dies.
Pension division may need to address survivor benefits, cost-of-living adjustments, retirement timing, early retirement benefits, disability benefits, and death benefits.
QDROs and Retirement Division Orders
Most retirement plans require a Qualified Domestic Relations Order, commonly called a QDRO, before benefits can be divided.
A QDRO is a separate order that tells the retirement plan how to divide retirement benefits. It must meet the requirements of the plan and applicable law. A divorce judgment may say that a retirement account will be divided, but the plan may still require a QDRO or similar order before it will actually divide the benefits.
Many plan types, including 401(k) plans, require a QDRO to move funds into another party's name, whether the plan is only moving a portion of funds to someone else or the entire plan is going to the other spouse. If a required order is missing, the plan may refuse to divide the account or a mishandled transfer may trigger significant tax consequences.
Not every retirement account uses the same type of order. Some plans use QDROs. Government plans may use different domestic relations orders or plan-specific forms. IRAs are often divided differently than employer-sponsored retirement plans.
It is often useful to involve a professional who drafts QDROs or other retirement division orders, especially when the plan includes both separate and community components or when benefits were earned before, during, and after the marriage.
IRAs and Divorce
Individual Retirement Accounts, including traditional IRAs and Roth IRAs, are often handled differently from employer retirement plans.
An IRA may not require a QDRO, but the division should still be done carefully and pursuant to the divorce judgment or settlement agreement. If an IRA transfer is not handled properly, there may be tax consequences or penalties.
The judgment should clearly state which IRA is being divided, the amount or percentage being transferred, and how gains or losses will be handled.
Common Problems With Retirement Accounts
Retirement accounts can be one of the most valuable assets in a divorce, so they should be handled with care.
- assuming the account belongs only to the named spouse
- failing to identify all retirement accounts
- forgetting pensions or deferred compensation
- using vague judgment language
- failing to prepare a QDRO
- waiting too long to divide the account
- ignoring account loans
- ignoring survivor benefits
- failing to address gains and losses
- failing to separate community and separate portions
- using the wrong valuation date
- not updating beneficiary designations
- offsetting retirement accounts without considering taxes