For many divorcing couples, the most significant assets to be divided in a divorce are the house and any retirement funds, whether those funds be in the form of an employer-sponsored account such as a 401(k) or a pension, or individually-managed IRA (including a SEP IRA and/or Roth IRA), solo 401(k), etc. There are several key points to understand in the division of retirement assets, both in how the ownership of the asset should be distributed to the parties, and the specifics of exactly how that division will be done.
Understanding Community Property and Retirement Assets
If your first thought is “my name is on the 401(k), so it’s mine” or “I’m the person who worked the hours to fund that IRA, so it’s mine,” then that is a misconception that needs to be corrected at the outset. In California, the general rule is that any funds earned during the marriage by either party are considered community property and are to be split 50/50 between the parties in a divorce. A premarital or post-marital agreement might have other agreements characterizing how those assets will be treated. For those following community property rules, the important question with a retirement asset is not whose name is on the asset, or who earned the funds, but whether the funds in the retirement asset were earned during the marriage.
If a retirement fund was opened during the marriage and funded entirely with money earned during the marriage, then, as a general rule, it will all be community property, subject to 50/50 division. But, in many cases, a person may have started funding a retirement asset prior to marriage and continued to fund it during the marriage. In that case, the fund will be a “mixed asset” containing both community property and separate property (the term applying to assets earned or purchased with earnings prior to the marriage).
It will then be necessary to determine how much of the fund is separate property (which is 100% distributed to the separate property owner) and how much is community property to be divided 50/50 between the parties. This can be a complicated analysis, particularly in a retirement fund where the assets change over time (e.g. selling X stock to buy Y stock, and then a few years later selling Y stock to buy Z bond fund), and your attorney may need to work with a forensic accountant to “trace” the separate property and community property and provide accurate valuations of what both parties should receive.
The Mechanics of Actually Distributing the Retirement Assets in the Divorce
Once there is an accurate analysis of what both spouses are entitled to with respect to the retirement funds, the next question is how to properly distribute each spouse’s share. This can also get tricky, especially where there are tax implications and/or where an employer-sponsored plan is involved. After all, if you have $100,000 in a 401(k) at the age of 40, you can’t simply withdraw $50,000 and hand it to the other spouse without dealing with significant tax and penalty consequences.
The simplest situation would be, for example, where Husband owns an IRA in his name of $50,000 that is entirely community property and Wife also owns an IRA in her name of entirely community property. It would not be necessary to split both IRAs in half – instead each party could be awarded the IRA in their name and they would be even-steven, at least with respect to those two IRAs. Keep in mind that community property is one big pile of all the community assets in a marriage – whether real estate, songwriting royalties, frequent flier miles, jewelry, bank accounts, etc. – and the idea is not to necessarily split each one of those assets in half, but to make sure each party gets their own pile of assets that is worth the same as the pile of assets the other party gets (and this may involve one party writing a check in the form of an “equalization payment” to the other to make the two piles equal in value). Thus, if one party gets retirement assets worth $40,000 and the other gets retirement assets worth $100,000 and nothing else, the first party should get $60,000 worth of additional assets to make the division equal (and also keeping in mind there are of course potential tax implications that also have to be considered, and which again may involve the input of a forensic accountant). It’s important to take the tax consequences into consideration during the negotiation.
In many cases, however, because a retirement asset cannot be accessed until years later, and, in the case of a pension, could be paid out incrementally month-to-month, it may be the case that one party will receive the retirement asset in their name, but the other party will have an ongoing interest in that asset, as awarded in the divorce. For example, if a wife is to receive a $5000 pension payment per month in retirement – and the pension is considered to be 100% community property and is split 50/50 in the divorce – it could be that wife receives $2500 per month and the husband receives $2500 per month.
To achieve that result after the divorce (and of course a pension may pay out for years and decades after a divorce), it may be necessary to incorporate a Qualified Domestic Relations Order or “QDRO” (pronounced “quadro” in common parlance) into the divorce judgment. This document instructs the administrator of the retirement plan how to distribute the funds, and is often necessitated by federal employment law. While this is not a particularly strenuous task to be completed when the parties have reached an agreement on distribution of property, it’s also not necessarily a do-it-yourself kind of thing, and parties are highly encouraged to work with counsel and/or a skilled mediator with the proper experience when dividing retirement assets that raise issues such as these.
Guidance on Your California Family Law Questions From a Westlake Village Family Law Attorney
If you would like to learn more about how our office can provide guidance on any California family law issues you are facing in Ventura County or Los Angeles County, contact the Zonder Family Law Group office today at (805) 777-7740 or (818) 877-0001, or schedule your strategy session using easy-to-use online form here.