Planning for retirement is, in many ways, a guessing game. You save a portion of your income to offset future expenses. You have no way of knowing how inflation will impact the buying power of your retirement funds or what expenses could increase substantially in the future. Still, you estimate your needs based on your current income and standard of living and try to plan ahead for your later years.
One thing very few people plan for when thinking of their retirement is divorce. Going through a divorce can impact your financial situation in a number of ways. There are costs associated with divorce. Generally speaking, the more contentious your divorce, the more expensive it becomes.
Assets built up over years, such as the equity in your home and your retirement fund may end up split, meaning you have fewer resources than you planned. Understanding how the courts handle retirement accounts in divorce can help you know what to expect.
Most retirement accounts are marital property
In most divorces, retirement accounts built up during the marriage will be marital property in the eyes of the courts. Unless you have a prenuptial agreement on record that addresses the retirement account and names it separate property, chances are it will get divided in the divorce.
Any assets you had in the account prior to marriage may not be subject to division, because it was your separate property before marriage. So long as there hasn’t been co-mingling, those funds and their interest earned should remain your separate property. Deposits made after your marriage, however, likely constitute marital property.
Typically, the courts will consider any assets acquired during the marriage marital assets that belong to both spouses. Regardless of any discrepancy in the income of the spouses or whose name is on the retirement account, both spouses will likely receive a portion of the assets within it, or an equivalent value of assets to offset the value of the account.
How the courts handle asset division
The courts will do their best to divide your marital property equitably. They will look at a number of factors to do so, including the assets and income of both spouses prior to marriage and currently, the length of the marriage, any children and their custody, issues with pensions or health insurance rights and the likely future financial situation of each spouse, as well as several other considerations.
If you feel concerned about tax issues or early withdrawal penalties, you don’t need to. Regardless of what kind of retirement plan you have, a court order requesting the division of the account will protect you from those financial penalties. Typically, when accounts get divided, a certain percentage of the existing account will get moved to a new account in the name of the other spouse. These days, it is a common practice, so there shouldn’t be much more than paperwork required from you.