Updated: Feb 19, 2021
Retirement accounts are often some of the most valuable assets of a marriage. Los Angeles clients want to know if their 401(k), IRA, pension, or other retirement plan is at risk in a divorce. Whether you're the participant spouse or the non-participant spouse, you want to make sure your financial interests are protected.
In California, marital assets and debts are divided evenly in a divorce
In California, all assets of a marriage, including 401(k)s, IRAs, and other retirement accounts or plans, will be divided. This allows the non-participant spouse to receive half the value of a plan that was accrued during the marriage.
Example #1: The retirement account was acquired during marriage, only one spouse worked.
In this example, Husband and Wife married in 1995 and separated in 2020, a marriage of 25 years. They were graduate students when they got married; neither had any retirement assets.
During the marriage, Wife was not employed. Husband was employed and was the breadwinner. In 2000, he began contributing to a 401(k) through his employer.
Over the course of the marriage, Husband contributed $240,000 of his marital earnings to the 401(k). At the time of divorce in 2020, the 401(k) was worth $720,000.
In this example, the 401(k) would be split evenly because it was acquired 100% during marriage. Each spouse would be entitled to 1/2 of $720,000.
Example #2: The retirement account was acquired in part prior to marriage.
In this example, Husband and Wife married in 2015 and separated in 2020. At the time of their marriage, Wife had a Roth IRA that was worth $100,000.
During the five year marriage, Wife contributed an additional $90,000 to her Roth IRA from her marital earnings. At the time of divorce, the account was worth $276,000 total.
In this example, the portion of the IRA earned during marriage would be split evenly - $90,000 plus appreciation thereon. Accordingly, if the $90,000 appreciated to $115,000 during the marriage, each spouse is entitled to 1/2 of $115,000.
The portion of the IRA earned prior to marriage would remain Wife's separate property - $100,000, plus appreciation thereon. Accordingly, if her $100,000 appreciated to $161,000 she would be entitled to the entire $161,000.
Total, Wife would receive $218,500 (her separate share plus her 1/2 of the community share) and Husband would receive $57,500 (1/2 of the community share).
TIP: If you think your spouse might withdraw from retirement assets before your divorce is final, you might be able to take steps to prevent it. It's important to contact an attorney to protect yourself.
Dividing retirement accounts in a California divorce: settlement or litigation?
Dividing retirement accounts in a Los Angeles divorce can be simple or complicated, depending on the nature of the accounts and the spouses' willingness to negotiate a settlement.
Generally speaking, settling the issue of retirement accounts via Marriage Settlement Agreement is more cost-effective than litigating a divorce in the Los Angeles Superior Court. Do not spend more than necessary on attorney fees, particularly on issues that can settle.
Options for dividing retirement accounts in California divorces
As discussed above, each spouse is technically entitled to 1/2 of each asset acquired during marriage. According to this general rule, each asset is individually divided. However, parties can choose to keep assets whole and offset value with other assets.
For example, a participant-spouse can keep her retirement account whole without paying out her ex-husband while the husband is awarded a larger portion of a different asset. In another example, a participant-spouse can keep his retirement account whole and agree to take on a larger portion of marital debt.
It's important to hire a prepared, creative Los Angeles divorce attorney in order to develop a negotiation strategy to solve the issue of retirement accounts without spending more than necessary.
What about penalties?
Transfers made pursuant to a divorce are generally penalty-free and sometimes tax-free. Parties may need a Qualified Domestic Relations Order (commonly known as a QDRO). This document directs the plan administrator to make a cash payment to the non-participant spouse, to pay out each spouse at the time of retirement in the future, or to roll over the non-participant spouse's portion into an account, for example an IRA.
Provided the participant-spouse makes this transfer pursuant to a QDRO, taxes or penalties should not be owed. If the non-participant spouse takes the cash instead of a rollover he or she will likely have to pay taxes on the cash payment as income.
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