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How California couples may opt to handle retirement funds in a divorce

On Behalf of | Apr 10, 2024 | Divorce

Those facing the end of a marriage may worry about changes to their standard of living and their future financial stability. In California, community property rules leave many people frightened about the impact of property division.

Almost anything acquired during the marriage could be subject to division during a divorce unless couples already have written agreements about property division. Assets tied to financial stability, including a residence and financial accounts, often provoke conflict between the spouses. Retirement savings can be both economically valuable and a source of the comfort for those concerned about their golden years.

What do California couples typically do with retirement savings when they divorce?

An account may be subject to division

It is common for people to hold separate retirement accounts in part because of employment arrangements. Tax-deferred retirement accounts associated with a specific job are common. People may have 401(k)s or other accounts that they contribute to regularly. Their employers might make contributions to those accounts as well.

In general, California spouses typically need to include all marital contributions to a retirement account in the marital estate. In other words, whatever funds they deposited during the marriage, as well as interest earned and employer contributions, may be subject to division when they divorce.

Spouses do have more than one option for addressing retirement savings during divorce proceedings. If both spouses funded accounts throughout the marriage, they might agree to simply keep their own accounts in the divorce. There may need to be adjustments made to reflect the difference in value between the two accounts.

Sometimes, one spouse has retirement savings while the other does not. Spouses can either arrange to offset the marital value of retirement savings with other property or they can divide individual retirement accounts. Early withdrawals from certain types of retirement accounts, like 401(k)s, can lead to tax consequences and penalties.

Thankfully, spouses dividing an account in accordance with a property division decree can avoid those expenses. By having a lawyer draft a qualified domestic relations order (QDRO), spouses can potentially split a retirement account without taxes or penalties reducing the overall account balance.

Depending on the circumstances, spouses may find that dividing the account is the simplest solution. Other times, the goal is to preserve the account and use other resources to balance its value. If spouses can’t reach an agreement that they both feel is reasonable, then they may need to take the matter to court. A family law judge can review the marital estate and decide how to divide marital property, including any marital contributions to retirement accounts.

Those with more complex marital resources, including retirement savings, often need to employ more caution than the average couple when preparing for a divorce. Identifying higher-value assets is an important step for those preparing for divorce in California.