Divorce And Retirement Accounts

wedding band and money, divorce and retirement accounts

Many people have retirement benefits, like a 401(k), through their employment.  Others have individual retirement accounts (IRAs). What happens to these accounts in the event of a divorce?

As with any item of property, we begin with the fact that in Missouri all property obtained during the marriage is presumed marital property.  Hence, if a spouse takes a job during the marriage with a retirement benefit or opens an IRA during the marriage, those accounts will be considered marital property.  At the time of divorce, the court will allocate to the other spouse his or her half share of the marital portion of the retirement account.

Let’s take a simple example.  If spouse A began working at a company during the marriage and ten years later, the marriage ends in divorce, spouse B will have a half interest in the value of the retirement account accumulated during those ten years.

What exactly is the value of the account?  In an IRA, it is easy to compute because the IRA will have a definite value at the time of the divorce.  In our example, let’s say after ten years the account has a value of $200,000. Each spouse will have a claim to $100,000.  To effect the transfer of the marital share to the other spouse, the court will enter a Qualified Domestic Relations Order (QDRO) which allows a tax-free transfer of the funds from the account of one spouse into a new account for the other spouse.  For a 401(k), the value determination can be complicated by vesting rules that may require a certain number of years of employment before one can claim full value. But aside from those qualifying rules, the valuation process mirrors that for the IRA.

What happens if a spouse had been working for a company prior to marriage and already established a 401(k) or IRA?  In that situation, the court will look to the total years of contribution and find the percentage of those contributions that are marital, and divide that marital share.  So, for example, if a spouse has been employed for 20 years at a company but married for only 5 at the time of divorce, the court will have to divide only 5/20, or 25%, of the total value of the account, so that the other spouse will receive 12.5% of the total account value.

Not all retirement accounts are immediately liquid.  Some 401(k) accounts may not have vested, as noted, or may have strict rules that they cannot be touched until retirement.

For those accounts that are liquid upon divorce, liquidating the funds has severe consequences, usually in the form of penalties for early withdrawal and taxation as income (and potentially capital gains).  Also, by claiming the funds early, a spouse loses future income earned if the funds had been allowed to continue to grow.

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