How To Treat RSUs, 401(k)s & Other Complex Financial Assets In Divorce

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Being a financially responsible person is excellent in most circumstances. Planning for retirement and working for a successful company are signs that you’re a responsible, prepared person. However, in one specific scenario, your retirement accounts, and startup participation can come back to bite you. If you’re getting divorced, you’ll need to divide your assets, and retirement accounts and restricted assets make that significantly more complicated.

Restricted stock units, or RSUs, are some of the most contentious of these assets. Other highly contested assets include 401(k)s and IRAs due to the complexities of fairly dividing their value without withdrawing funds. In this article, you’ll learn why these different accounts take so much work to divide appropriately and how they can be split in your divorce.

The Purpose of RSUs

RSUs are a unique type of compensation used by many companies to give employees a reason to remain with the business. They’re called “restricted stock units” because they aren’t simply stocks in a company. Instead, they are promises to issue shares to an employee once they’ve met certain conditions. They’re restricted until the employee has hit specific performance goals or length of employment in many cases. They are also frequently used by startup founders as compensation instead of drawing a paycheck until the company succeeds.

The restriction is typically tied to a vesting schedule. Recipients are granted RSUs that are then vested based on a pre-set schedule. Before vesting, RSUs are worthless to anyone but the employee, while after they’re vested, they are converted into the stocks the employee has received.

RSUs vs. 401(k)s

There are many types of incentives employers offer to retain employees. 401(k) accounts are another, more common incentive that companies use to encourage their staff to remain.

A 401(k) account is an investment account that both employees and employers contribute to. An employee can contribute pretax income to their 401(k), and many employers choose to match the employee’s investment up to a certain percentage of their salary.

Unlike restricted stock units, 401(k)s have value no matter what. There’s no need for them to vest. They can also be rolled over from one employer to another in most cases. However, owners of a 401(k) can’t withdraw funds until they’re at least 59.5 years old, so they’re less immediately useful than vested RSUs.

RSUs vs. IRAs

IRAs are similar to 401(k)s, but they aren’t connected to any employer. IRA stands for Independent Retirement Account, and it’s a specific type of investment account that allows people to save for their later years without an employer. Like 401(k)s, IRA owners can’t withdraw funds until they’re 59.5 years old. However, there’s no need to transfer IRAs when an employee transfers jobs. Compared to RSUs, IRAs are more flexible but much more limited. They require the employee to invest their own funds instead of receiving further employer benefits on top of their salary.

Why RSUs and Retirement Accounts Make Asset Division Complex

RSUs are by far the most complicated asset in many divorces. Their value is foggy in multiple ways.

For example, an RSU is entirely without value until an employee meets the vesting schedule. If the RSU earner leaves their job before the restricted stock units vest, then they are literally worthless. Furthermore, an RSU is a promise to provide stock. The value of the stock at the time of vesting is often unclear. So, not only do RSUs have the potential to be worthless, the value they will have is undefined.

401(k)s and IRAs also pose problems, though not as many. A 401(k) account is by nature attached to a person and their job. Dividing a 401(k) fairly without the presence of other investments can put the 401(k) owner at risk of tax penalties unless it’s done carefully.

Meanwhile, splitting an IRA has limits, too. Couples must decide whether to share ownership or split the IRA into two separate accounts and then work with financial professionals to ensure those accounts are set up appropriately and fairly.

How Couples Divide Complex Assets in Divorce

So, your retirement planning and startup stocks make asset division harder. That doesn’t mean it’s impossible to find a fair split. People get divorced and fairly divide their RSUs and retirement accounts every day. Here are some typical solutions for dividing these complicated assets.

RSUs

There are two strategies for dividing RSUs: leaving them entirely with the person who earned the RSUs or splitting them with their partner. Splitting RSUs down the middle is the most “equal,” but it’s not always what either person wants.

The person earning the RSUs may want to keep them because they believe they will be extremely valuable down the road. On the other hand, their partner may not think the RSUs will be worth much and prefers to receive different assets. In both cases, it’s essential for a trustworthy financial professional to value the restricted stock units so the rest of the couple’s assets can be divided appropriately.

401(k)s and IRAs

The process of dividing assets like 401(k)s and IRAs is primarily one of preventing tax penalties. Withdrawing funds to split the face value of these retirement accounts can lead to significant tax burdens for both people.

Instead, couples frequently make independent decisions regarding their share of these accounts. One person may choose to keep their half in the account, while the other may decide to withdraw the funds and accept the tax loss or roll their funds into an independent account. Either way, the process takes effort and input from financial professionals to minimize lost funds.

Get the Help You Need to Divide Complicated Assets

You’ve worked hard to save for retirement and diversify your portfolio. Divorce shouldn’t end all that work. You can protect your investments and assets during a divorce by working with expert high-asset divorce attorneys.

The right attorney will help you navigate the legal and financial complexities surrounding your retirement and investment assets. You can make your divorce that much simpler just by working with the right professionals. Take action today to protect these valuable assets by scheduling your free consultation