Property division is one of the most complicated aspects of the average divorce case. It can be difficult to separate the life you built with someone, potentially for many years, in a way that feels fair to both of you. If you cannot reach a property settlement, however, your case will have to go to court. One of the trickiest assets to divide for many couples is a retirement account.
What Are the Property Division Rules in California?
California is unique in that it is a community property division state. Under this law, all property and assets collected by a couple while they are married – referred to as the “community” – will be split evenly in a divorce or legal separation. All assets and debts accumulated during the marriage will be divided in half, 50/50, if the case goes to court, regardless of whether this is fair for either party. In equitable division states, on the other hand, marital property is allotted to each spouse according to what is fair or equitable, such as which spouse brought each asset into the marriage.
How Are Retirement Accounts Divided in a California Divorce?
A retirement account can be one of the most valuable assets owned by a couple, especially if they have been married for a long time and are divorcing late in life. When the marriage ends, all retirement accounts and funds will most likely be split between the spouses. Several state laws will apply to this type of division, including the community vs. separate property law.
It will need to be determined whether the retirement account was created and contributed to prior to or during the marriage. If the account was created before the marriage and kept separate by the owner, it is separate property and will not be divided by the courts. If it was created after the marriage, contributions to the account will be considered community property and will be divided in a divorce case.
In general, contributions made to a retirement account (and other increases in the fund’s value) are classified as community property. This includes IRAs, 401(k)s, 403(b)s, pension plans and QDROs. If the couple gets divorced or legally separated, the funds present in the account will be split down the middle. If the couple legally separated before getting divorced, anything added to the account after the date of separation may be considered separate property and safe from division.
Different Ways to Split a Retirement Account
A retirement account is a complicated type of asset to divide. There are multiple options available for splitting retirement savings in a divorce case. You and your spouse can attempt to reach a property settlement agreement using one of the available methods to avoid the matter going to court. Potential division methods include:
- Lump-sum payment: if one of you opened the retirement account while the other is listed as an “alternate payee,” the alternate could agree to receive a single lump-sum payment for his or her share.
- Transfer incident: IRA divisions are specifically classified as “transfer incidents,” where no taxes will be assessed on the separate transaction. The IRA custodian will classify it as a transfer or rollover, depending on the circumstances.
- Qualified domestic relations order (QDRO): if the owner of the retirement account’s spouse uses a QDRO to divide a retirement plan in a divorce decree, this can allow the attachment of qualified-plan assets without tax penalties. This is an exception to the standard protections against attachment by creditors given to qualified retirement plans.
You may need to get help from a divorce attorney or go through mediation (alternative dispute resolution) to achieve a compromise and prevent a 50/50 split of your retirement account. The complex property division lawyers at Boyd Law can help you fight for a fair share of a retirement savings account with as little stress as possible.