Common Problems in Dividing Retirement Assets in Divorce

protecting your business in a divorce

Perhaps the most important marital asset to divide in a divorce is the retirement account, because after Social Security, it likely will be the asset to sustain a former spouse in later years. So protecting a marital share in this asset is critical for retirement planning purposes.

In general, any addition to a retirement account during marriage, whether by direct contribution or increase in value of those contributions, is a marital asset subject to division. Typically, a court will award a spouse a half interest in the marital portion of the retirement account as of the date of the divorce. So for example, if a couple has been married ten years and husband made $100,000 of contributions and increased value on those contributions during the marriage, wife would be entitled to $50,000 at the time of the divorce.

It is at this point that individuals tend to make some costly mistakes.

First, if the spouse takes the $50,000 as a cash payout, the spouse will have to pay taxes (both income and capital gains) and an early withdrawal penalty. So, taking cash up front is usually a costly move. By contrast, if the spouse simply rolls the $50,000 over into her retirement account, she will continue to enjoy growth of the asset with no tax consequences until retirement.

Second, other assets that are divisible but not immediately accessible until retirement, like a pension, should be carefully divided by a specific percentage for a defined period of time. Also, the spouse will want to be sure that the asset survives her death and can be transferred through trust or inheritance.

Third, some forms of pension benefits are deferred compensation and may not vest until long after divorce. A spouse will want to be sure to define a claim to this asset and to protect the interest in the future when it ultimately vests.

Retirement asset division can be quite complicated, and it is important to discuss with your attorney what specifically you want from each asset so you are not confused as to your actual portion and its value and when you can claim it.

If you have further questions about retirement accounts and divorce, contact us – we can help.