How Can A Divorce Affect Your Retirement Account?

June 28, 2021

How Can A Divorce Affect Your Retirement Account

When you and your spouse divorce, the property you shared as a couple is also divided between the two of you. This not only applies to physical property, such as cars and homes, but also to financial assets. One of the biggest financial concerns during this time is “will a divorce affect your retirement account?”

According to Colorado law divorcing parties may receive a fair share of the other party’s retirement account. To make sure that retirement accounts are split fairly, it’s imperative to determine the accurate fair market value of the retirement asset. At Brighter Day℠ Law, we protect our clients’ interests with the help of knowledgeable experts, who can uncover the true value of these assets. To schedule an initial consultation with a skilled Colorado Springs, CO, divorce lawyer, call us today at 719-733-9129

How Can I Protect My Retirement Accounts During the Divorce Process?

Divorce can have a significant emotional toll on your life, but it can also have a long-term impact on your financial status. Because there are many factors you’ll have to consider, including child custody, if you and your spouse have younger children and child support, spousal support, what happens with the marital debts, and how the marital assets will be split up. Typically, all of this depends on whether you and your ex-spouse have an amicable or contentious divorce.

Separating your property from that of your spouse can be tricky, especially if your pension plan is involved. Often, a pension plan earned by one spouse is considered a joint asset, thus it’s subject to division during the divorce proceedings. If a marital division is ongoing, here’s what you can do to protect your retirement plans, including pension benefits.

The first thing in protecting your pension while going through a divorce is knowing the rules in your state. Although a pension can be divided up between divorcing spouses, the division isn’t automatic. Your soon-to-be-ex-spouse must make a request for a share of whatever you’ve accumulated before the divorce is completed.

Your ex-spouse would need to file a document called Qualified Domestic Relations Order (QDRO) before he or she is granted any financial benefit from a pension or other retirement accounts, including a 401(k).

Regarding how much each party is entitled to, the general rule is to split pension benefits earned during the marriage right down the middle. Although this means your spouse can lay claim to half of your pension benefits, they’re limited to what was earned during the marriage.

If you were enrolled in a defined-benefit plan for 15 years before the marriage, for instance, any contributions you or your employer made on your behalf during that period of time won’t count towards the amount your spouse could seek in a divorce.

After familiarizing yourself with the rules governing the division of pension benefits in your state, next, evaluate how the pension plan works. The first thing you need to do is to verify the method by which payments are distributed, and the second step is to verify whether the pension plan offers a survivor’s benefit.

With a pension, you have to decide between receiving a monthly annuity or a lump-sum payment. If your plan features a joint-life payout, the payments will continue throughout the life of the surviving spouse and if the plan features a single-life payout, and you choose the annuity option, the pension payments will stop once you die.  

It’s vital to understand how the pension plan works because it affects how you and your former spouse will split the assets as part of the divorce. For instance, if you have a single-life payout, your ex-spouse is subject to the payment option you chose when you signed up for the plan. However, if your plan offers survivor benefits, the best option is to persuade your former spouse to maintain that benefit, instead of seeking a lump-sum distribution. Your ex-spouse would have to include these benefits as part of their gross income, but they can claim a deduction for estate tax. 

Further, it’s imperative to consider offering your ex-spouse other assets if you don’t want to lose half of your pension. You may allow your ex-spouse ownership of a mortgage-free home you own together. Or consider buying a life insurance policy that’s equal to your pension benefits and name your ex as the sole beneficiary. In each case, you offset what your soon-to-be-ex-spouse would get from the pension plan with something else of equal value.

You may have an advantage if your spouse also has a pension plan or other retirement accounts to protect. If both you and your ex-spouse have retirement accounts that are similar in size, agreeing to walk away with what you already own is a less time-consuming way to resolve the issue.

Further, it’s a good idea to consult a professional about your financial options regardless of your situation, especially when you’re about to separate or are in the middle of a divorce process. There are experts in the industry who specialize in the division of marital assets when couples divorce. These experts are known as certified divorce financial analysts (CDFAs).

Certified divorce finance analysts are trained mediators who help people going through amicable divorce proceedings or medication. They provide divorcing parties with the expertise they need to manage their property outside of the legal system. These professionals assist divorce lawyers and people going through a divorce make important decisions regarding the division of assets and how that may affect their financial future.

If you consult a CDFA, they will collect all your financial information, help you come up with a budget and key objectives, and determine any investment risks you may face. Then they’ll review your assets, including your retirement plan, advise you on how the division of assets will impact your future, and any tax consequences you may face.

How Are 401(k) Accounts Divided During a Divorce?

All the funds you contributed to the 401(k) account during your marriage are marital property and subject to equitable division during the divorce unless if a valid prenuptial agreement exists. For instance, if you were married for ten years and during that time period you contributed $100,000 to your pension plan or retirement account, your spouse is likely to be entitled to a 50% share or $50,000.

However, it’s essential to note that whether your spouse ends up with a part, all, or none of your 401(k) benefits depends on how your overall marital assets are divided. For instance, if your soon-to-be-ex-spouse also has a retirement account or pension plan worth a similar amount, you may each opt to keep your own retirement accounts.

Typically, the division of retirement accounts is one of the most complex issues during divorce proceedings. There are tax consequences and unique laws and rules that apply.

For example, a divorce allows you early access to your 401(k) account or IRA without a tax penalty, especially if your ex-spouse is awarded part of your retirement account.

Also, dividing retirement accounts during divorce is very tricky because investment accounts are often tied to the stock market. And any changes in the stock market directly affect your retirement account’s value. Thus, very specific language must be used in the divorce decree.

Can I Get Half of My Husband’s Retirement in a Divorce?

Not automatically, but this primarily depends on the laws and rules of your state. Most states, including Colorado, follow equitable distribution laws, which means marital assets are is divided “fairly” but not always equally. A few community property states divide all marital property 50/50 during a divorce.

What Do I Need to Consider During a Divorce?

Once the divorce process starts, you must consider the following retirement account issues:

  • Tax-free income, income taxes, and your tax bracket.
  • Rollover accounts.
  • Prenuptial agreements, if any, exist.
  • Whether your state is a marital property state or community property.
  • Overall retirement funds and savings accounts.
  • Any specific terms outlined in the divorce settlement, such as getting to keep a family pet or the cabin.
  • Stocks or other payouts.

These financial considerations will eventually affect the final number your ex-spouse gets in the divorce.

At Brighter Day℠ Law, we’re committed to making sure that our clients emerge from a divorce with a fair share of marital assets, including retirement accounts. However, it’s imperative to note that sometimes determining the fair share during the division of marital property may require some investigation.

No matter the type of retirement account in question, our experienced Colorado family law lawyers will take forceful legal action to protect your interests and rights to the fullest extent of the law. To schedule an initial consultation, contact our law office in Colorado Springs today at 719-733-9129, or chat with us online to learn how we can help. 

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