What happens to my retirement accounts during a divorce?
One of the concerns that often arise in a divorce case is, “What happens to my retirement accounts?” Retirement accounts are not only one of the largest assets in many cases, they are among the most personal ones. For many people these accounts represent both the efforts of the past as well as the goals of the future. Contributions are usually made from wages, so there is sweat equity in the account balance. The dollar value represents years of work to accumulate the total. At the same time, the purpose of a retirement account is to build for a future. So the accounts also represent our dreams for a time after we are done working. As a result, determining how to divide the accounts, who gets what portion of the assets, can be very emotional.
The first thing to know is that, as a general rule, retirement accounts are marital property subject to division in a divorce in Kansas. It does not matter which spouse contributed to the account or whose name is on the account. Funds contributed during the marriage (as well as any increase in the value of the account during the life of the marriage, if the account pre-dates the marriage) are within the court’s jurisdiction to divide.
The second thing to know is that funds may have different tax consequences. These differences can be very important in determining how to divide the accounts. For example, if one spouse has $100,000 in a 401k account and the other spouse has $100,000 in a Roth IRA account, those values may not be equivalent. The 401k is usually a tax deferred account – taxes are not paid until the funds are withdrawn. If each spouse keeps their own account after the divorce, the spouse with the 401k is going to have far fewer assets available in retirement. This is because they will probably have to pay taxes on all funds withdrawn from their 401k. Of the $100,000 total in the account, they may only get to use $70,000, the balance going to taxes. The spouse with the Roth IRA, on the other hand, may not owe any taxes. Contributions to a Roth are typically made post-taxes, and all growth can be tax free. So this spouse may get to use all $100,000 in their account at retirement. The difference in tax treatment can be a critical factor in negotiating a divorce settlement.
A third thing to know is that dividing the various accounts takes different documentation. An IRA, either a Roth or a traditional, can usually be divided with just a copy of a Divorce Decree and/or Separation Agreement which has been reviewed and approved by the court. A 401k or an employer provided pension, on the other hand, requires a separate court order, known as a Qualified Domestic Relations Order. Using this Order allows the fund to be divided between the former spouses without trigger any immediate tax obligations. Finally, there are other accounts which require more detailed analysis. For example a SEP IRA may be divisible with just the Divorce Decree if the contributing spouse is an owner in the business, but it may require a QDRO if the contributing spouse is an employee.
If you have retirement accounts they may be subject to division in your divorce case, you should talk to a knowledgeable family law attorney near you. The cost of having an attorney on your side during the divorce may be far less than the costs of making a mistake in dividing these accounts.