Divorce requires that spouses separate their lives. They stop living together, stop sharing their income and stop splitting financial obligations. Actually separating finances can be one of the biggest challenges that couples face during divorce proceedings.
The more property and income they have accumulated during the marriage, the harder it becomes to separate their lives. Many professionally successful adults set money aside for retirement. Others may actually qualify for pension benefits offered by their employers. People frequently worry about retirement savings and pensions as they prepare for divorce.
What usually happens with retirement accounts when a marriage ends?
Resources may be subject to division
Some people assume that they can protect their retirement savings or pension benefits because they hold the account solely in their name. That is not what the courts consider when determining if assets are subject to division.
The date of acquisition is the most important consideration. Retirement savings and pensions are often at risk of division in a divorce. Any contributions made during the marriage are usually part of the marital estate unless there is a prenuptial agreement establishing those savings as separate property.
Equitable distribution rules mean that spouses may have to actually divide accounts or take their value into consideration when dividing other property and financial responsibilities. If the marital estate includes a 401(k), the spouses may need to draft a qualified domestic relations order (QDRO) to divide the account without penalties or tax consequences.
Roth IRAs are easier to divide without penalty. Pensions may not technically be divisible because they are an earned benefit and not necessarily a financial account. Spouses may need to factor in the value of the pension when dividing other property or may need to make arrangements for payments when the spouse who receives the pension finally retires.
Couples always have the option of retaining control over that process by negotiating their own asset division settlement. Otherwise, they must wait for a judge to review their finances and determine what is fair. Knowing which assets are subject to division can help people plan as they prepare for a complex divorce. An appropriate strategy can help people preserve as much of their retirement resources as possible after the end of a marriage.
