When it comes to property division in divorce, two types of assets usually take center stage: the marital home and retirement accounts. Retirement assets – 401(k)s, individual retirement accounts (IRAs), pension plans and the like – can account for a significant portion of your net worth. So how do you go about dividing them fairly?
Community property principles
California is a community property state, which means the court must divide community property – that is, property obtained by either spouse during the marriage – equally. For retirement accounts, as a general rule, any value accrued during the marriage must be split 50/50.
Prenuptial or postnuptial agreements might change the outcome. Note, however, that these agreements must meet strict legal requirements to be valid.
Property division becomes more complicated when one or both spouses established their retirement accounts before marriage. The premarital value of those accounts is considered separate property, which means it’s not subject to 50/50 division. Determining the amount subject to division usually involves taking the current value and dividing it pro-rata over the number of years you’ve been married.
The mechanics of dividing retirement accounts
Retirement accounts aren’t as easily divisible as other assets. For one thing, their value is constantly in flux. For another, steep penalties apply for removing funds early. Draining the accounts to provide a cash payout would mean taking a big financial hit. What’s more, federal law generally doesn’t permit account holders to transfer ownership.
A way around this dilemma – and an exception to the prohibition on transferring ownership – is a qualified domestic relations order (QDRO). A QDRO is a court-issued judgment outlining the retirement account division. The retirement account administrator will implement the QDRO. Depending on the type of account and the terms of the QDRO, the spouse (or “alternate payee”) might receive their share in a lump sum, as a rollover into their own IRA or in monthly installments.
Another option is for the spouse who owns the retirement asset to buy out the other’s share – offsetting it with other property or through a cash payment. Determining the value of the buy-out can be complicated. Talk to a lawyer about your options.