Dividing Retirement and Pension Funds in a California Divorce

October 18, 2012

Dividing Retirement and Pension Funds in a California Divorce

People have a variety of options available to them for retirement savings, including 401(k) accounts, 403(b) accounts, company pensions, stock shares and Keogh accounts. When married couples divorce, they need to apportion those retirement savings between themselves as part of the property division. California residents should understand the steps involved in awarding retirement funds in divorce.

Retirement Account Funds Marital Property

Retirement accounts that people open during marriage are marital property because they deposit marital funds, or income earned during the marriage that legally is the property of both spouses, into the accounts. If a person has a retirement account prior to marriage, the funds in the account may be considered separate property, but any increase in the value of the property during the marriage will be considered marital property.

Qualified Domestic Relations Order

If part of the marital estate includes a 401(k) account or an employer pension, the court must issue a Qualified Domestic Relations Order to instruct the employer or account administrator how to disburse the funds to a non-employee ex-spouse. QDROs allow people to withdraw funds from retirement accounts and deposit them into different retirement accounts without incurring early withdrawal penalties.

People who need to prepare QDROs as part of a divorce settlement should draft the QDRO and present it to the retirement account administrator well before the divorce is finalized, in case there are any problems with the way the parties have divided the funds. If the parties need to renegotiate property divisions because of constraints of the retirement account, they need to ensure they have time to do so before the property division is final.

IRAs and SEPs

IRAs and SEPs do not require QDROs. People still need to use care when dividing those funds, lest they incur tax penalties. The divorce settlement paperwork must contain specific language noting that withdrawals from the accounts and deposits into the other spouse's retirement accounts are done in accordance with Section 408(d)(6) of the Internal Revenue Code and are therefore tax-free. If that language is missing, the person withdrawing funds will owe income tax on the money as well as penalties for early withdrawal.

Consult an Attorney

Negotiating and drafting QDROs and dividing other retirement accounts can be very complicated. Not all attorneys are experienced in the matter. If you are considering divorce and have retirement assets, contact an attorney well-versed in complex property division.

Article provided by Brave, Weber & Mack, APLC
Visit us at http://www.bravewebermack.com