Many professionals have retirement accounts connected to their employment. They accrue pension benefits over many years or make regular contributions to a 401(k). Others may start private accounts, such as a Roth IRA, as a means of saving as much as possible for their golden years. Retirement accounts can often be among the most valuable assets people acquire during marriage, especially if they are in their 40s or beyond. It is only natural for people to worry about the protection of assets that can have a major impact on their quality of life in the future.
Who typically retains retirement accounts when couples who have saved for the future decide to divorce?
Retirement funds are likely marital property
Most divorces require that spouses split certain assets. Retirement accounts are typically part of the marital estate. Even though the account may only show one spouse’s name on ownership paperwork, they most likely made contributions to the account throughout the marriage. The account holds a substantial amount of marital income that theoretically belongs to both spouses.
Therefore, the balance in the account is at least partially marital property. Spouses may either need to offset the value of the retirement account with other assets or negotiate terms for dividing the account. Allowing one spouse to keep more marital assets or having them take responsibility for more marital debt may make it fair for one spouse to retain the entire retirement account.
It is also possible for divorcing couples to use a qualified domestic relations order (QDRO) drafted after the courts issue a final property division decree to split their retirement savings without penalties or significant tax consequences. Each spouse may receive a specific percentage of the account’s initial balance as part of the property division process.
Typically, spouses have to at least account for the value of the retirement savings in their property division negotiations. Unless the spouses have a prenuptial agreement protecting retirement savings as separate property, they very likely need to divide or at least offset what they have saved during the property division process.
Understanding what happens with the most valuable marital assets can help people as they strategize for divorce. Retirement accounts are often subject to division and can have a profound impact on the overall distribution of marital property.