Retirement assets can represent a significant source of wealth as well as financial stability for the future. Dividing retirement accounts in divorce can be complex, but understanding the basics and hiring an experienced family law attorney can help you navigate the process smoothly and protect what’s yours.
Quick Facts About Divorcing With Retirement Savings in California
- California is a community property state. Assets acquired during marriage, including contributions and growth in 401(k)s, pensions, and IRAs, are generally divided 50/50 in a divorce. Contributions made before marriage or after separation are considered separate property.
- Dividing community portions of 401(k)s, pensions, and other employer plans require a QDRO. A Qualified Domestic Relations Order legally divides the assets and ensures that the non-participating spouse receives their share of the account without incurring taxes or early withdrawal penalties.
- Dividing the community portion of an IRA does not require a QDRO. It can be transferred directly to the receiving spouse through a transfer incident to divorce, with a divorce decree, without incurring taxes or penalties.
- Changes to your marital status do not automatically change beneficiary designations on bank accounts, investment accounts, or retirement plans. You must contact each institution directly and file the appropriate paperwork to update your beneficiary designations.
Strategies for Safeguarding Future Financial Stability
- Prenuptial Agreement: Before getting married, have an attorney draft a prenuptial agreement which specifies that retirement contributions and earnings will remain separate property. This proactive step can help avoid significant financial complications later, particularly in the case of a high net worth divorce.
- Post-nuptial Agreement: A married couple can establish a postnuptial agreement that clarifies how retirement assets will be handled in the event of divorce. A postnuptial agreement must be created in good faith, not in contemplation of divorce.
- Clear Records: Keep documentation detailing each account’s starting date and balance, contribution dates and amounts, and appreciation over time. This information helps establish which portion of your retirement assets is separate property and supports an accurate valuation.
- Asset Negotiation: Professional legal guidance and strategic negotiation can help achieve equitable asset division while protecting your long-term financial goals. If you prioritize your retirement assets over the marital home or other community property, you may propose a settlement in which your spouse keeps a larger share of the marital home in exchange for you keeping the entirety of your retirement accounts. Any agreement reached in a divorce settlement must be finalized in the divorce judgment to be legally enforceable and prevent future disputes.
Mistakes To Avoid With Your Retirement Savings
Some people may be tempted to withdraw funds from their retirement accounts before a QDRO is finalized to avoid dividing their savings. However, this is a very bad idea.
Without a QDRO, retirement plan administrators typically will not process the transfer. Furthermore, withdrawing retirement savings without a finalized QDRO can lead to serious financial and legal consequences, including taxes, penalties, and court sanctions, that significantly reduce your nest egg.
When a divorce petition is filed in California, an automatic temporary restraining order (ATRO) goes into effect. The ATRO prohibits either spouse from transferring or withdrawing community property, including retirement accounts, without court permission or written consent from the other spouse. Cashing out a retirement account before it is legally divided would be considered a violation of the ATRO.
Call Kaspar & Lugay LLP to Keep Your Retirement Safe
Working with an experienced family law attorney is the best way to ensure that your retirement assets are handled properly and in compliance with the law.
At Kaspar & Lugay LLP, we guide clients through every step of divorce and asset division with exceptional legal counsel and personalized care.
Call us today at 415-789-5881 or visit kasparlugay.com/contact/.
