When divorcing couples begin dividing their assets, they often find their retirement account or accounts are the most valuable thing they own. Even if the account is an employer-maintained benefit, such as a 401(k), IRA, profit-sharing plan, or another such account, and is in the name of only one spouse, the earnings in that account that occurred during the marriage are community property in California.
Dividing Retirement Funds When the Account Existed Before the Marriage
This will require tracing of funds to determine how much money was deposited into the account prior to the marriage and how much after. Then, there is an apportionment of the unrealized gain of funds in the account both prior to and during the marriage as well as any unrealized losses in the account funds.
If the account was not opened prior to the date of the marriage, then the value of the account at the date of separation is what will be divided in the divorce process because there are no separate funds to trace.
The Qualified Domestic Relations Order (QDRO)
There may be a time when the spouse who owns the retirement fund wants to simply write a check to equalize the division of the account. The spouse who does this will be faced with an early withdrawal penalty, which is 10 percent of the funds withdrawn for the IRS. California adds another 2 percent for state taxes.
Through a QDRO, the retirement plan account may be split without having any tax implications. The order is complex and covers how the funds in the retirement plan are to be divided, including pre-retirement death benefits, and many other factors.
If the spouses decide to maintain the retirement plan and not withdraw funds from it to pay off the non-owner spouse, a QDRO is required. The court’s final order of divorce does not cover how a retirement plan will be divided. If they fail to obtain a separate QDRO, the plan will not be divided no matter what their final divorce decree says about it.
Valuing a Pension
Pensions are more complicated and require an actuarial calculation to determine their value. They cannot be split just by looking at the statement. A financial professional who can put a value on the pension is required.
Retirement accounts are a very important part of any divorce settlement. Failure to manage these divisions properly can result in losing out on benefits that you are entitled to receive. For more information on dividing 401ks, pensions or other retirement account contact JD Heberger at 559-227-9772.