Divorce is typically a complex process, especially if you and your spouse were married for a more extended period. In many divorces, spousal pensions and retirement accounts often have the highest-value assets.
Conversations and disputes around retirement accounts can become heated and complex during a divorce. Often they are subject to special requirements and considerations, and it is essential to understand how to protect your assets and your future.
This article will discuss different retirement accounts and give you a basic understanding of how retirement plans are distributed in a California divorce. Keep in mind that it is in your best interest to hire an expert Kern County divorce attorney to ensure that your retirement assets are protected.
Most Retirement Funds Are Included In Marital Property
California considers any income either party earns during the marriage to be shared marital property. Defined contribution retirement plans such as 401(K), 403(b), or 457 accounts, as well as SEPs or IRAs, are counted as marital property as these accounts are funded by income that is considered marital property.
Suppose one or both of the divorcing parties opened a retirement account before the marriage. In that case, they might be able to claim they are premarital deposits to the account as a separate, non-marital party to avoid dividing the income with a former spouse. Laws differ from state to state, and California law also treats any interest earned on premarital contributions to a retirement plan as separate property.
Defined Contribution Plans In A California Divorce
Federal law governs defined contribution plans, including the payments from these plans, which are divided In the event of a divorce. Divorcing couples with a defined contribution plan included in their divorce decree will need to issue a Qualified Domestic Relations Order (QDRO) in addition to the divorce decree. The QDRO Is necessary to authorize the plan administrator to issue payments to the non-employee ex-spouse and is a particular court order that is required regardless of whether your divorce is amicable.
In addition to permitting the plan administrators to distribute money to the account holder’s ex-spouse, a QDRO also allows the ex-spouse to withdraw money from the account and deposit the funds into other retirement accounts without incurring any of the penalties that are usually charged with early withdrawals from retirement funds.
QRDOs only apply to retirement plans covered by a federal law called ERISA and are not effective for distributing assets from non-qualified plans, including stock options, excess benefit plans, and supplemental executive reimbursement plans.
Certain types of retirement plans that need a QDRO will also require “joining” the plan as a party to your divorce. An experienced attorney can help you with this complex process. Examples of plans that require this “joiner” to obtain a QDRO include:
- Federal government plans such as Civil Service Retirement System (CSRS), Foreign Service Pension System (FSPS), and Federal Employees Retirement System plans.
- State government plans such as California State Teachers’ Retirement System (CalSTRS), California Public Employees’ Retirement System (CalPERS0, and University of California Retirement System (UCRS) plans.
Qualified plans covered by ERISA include:
- Private company pensions
- Deferred compensation plans
- Employee stock ownership plans
- Profit-sharing plans
- Severance plans
It is critical to understand that without a QDRO in place, the administrator of the plan will not be allowed to distribute any funds to the non-employee ex-spouse. Also, ensure you learn how to protect your finances in a California divorce.
Various Other Retirement Benefits
SEPs and IRAs do not need to have a QDRO for the court’s division of assets. However, the divorce decree must contain language that states explicitly that any withdrawals and transfers by the ex-spouse are under section 408(d)(6) of the Internal Revenue Code and, therefore, tax-free to avoid paying early withdrawal penalties and income tax.
Division Of Retirement Plans
There are several factors to determine who gets what regarding retirement plans. Sometimes the answers are not as straightforward as they may seem.
Essential questions include:
- What is the present value of the retirement plan?
- Is the entire amount subject to distribution as community property? If not, is a portion considered community property while the remainder is deemed separate property?
- Would one spouse give up their share in the retirement plan in exchange for other community property assets? Is that an intelligent choice based on the long-term projections of both the retirement plan and the support?
- Are one or both of you military officers? Special considerations under the Uniformed Services Former Spouses Protection Act (USFSPA) apply to military pensions.
While you may be tempted to just split everything quickly in an attempt to finalize your divorce, it is critical to understand that the division of retirement accounts and assets requires a lot of attention to detail. It is essential to consider long-term growth on investment accounts, retirement accounts, and other assets that you and your ex-spouse may have invested. Working with an experienced attorney who can look out for your best interest and ensure the divorce settlement is equitable is critical.
Schedule An Appointment With A Skilled Divorce Lawyer At Azemika & Azemika
Our law firm, Azemika & Azemika, serves Kern County and is exclusively devoted to family law. Our skilled attorneys customize solutions based on the needs of each client. We are experts in cases involving divorce, child custody and visitation, child and spousal support, adoptions, and more.
We are here to help you; you deserve the best representation to protect your rights and future. Contact us today for a consultation.