How can divorcing couples effectively split retirement accounts?

On Behalf of | Aug 15, 2023 | Property Division |

Married couples in California tend to plan joint futures. They expect to share certain financial obligations, including the cost of housing and insurance. They often save money together for retirement and other upcoming financial challenges. If married couples in California decide to divorce, their retirement savings will often be a point of contention during divorce negotiations, partially because each spouse has so much at stake.

Many adults understandably worry about losing retirement savings and struggling financially during their golden years when they divorce. Understanding one’s options concerning divorce-related retirement matters can help parties to take more informed approaches when ending a marriage.

Couples often share some retirement savings

The longer people have stayed married, the greater the chance that a significant portion of their retirement savings are marital property. Under California’s community property statutes, the income that people earn after getting married and any assets that they acquired during their marriages will be marital or community property. Those assets belong to both spouses and are subject to division during divorce proceedings. Although some people assume that they can treat their retirement savings as separate property if they keep the account solely in their name, that is not necessarily true. Unless they have an agreement with their spouse in writing setting those savings aside a separate property, they may still be subject to division.

Couples can avoid penalties and taxes

The good news about handling retirement funds in a divorce is that couples don’t necessarily have to worry about early withdrawal penalties and taxes. If they choose to divide the account, they can have the courts approve a qualified domestic relations order (QDRO) that will help them bypass the penalties typically assessed for early withdrawal from tax-deferred retirement accounts. Spouses can also potentially negotiate a property division arrangement that does not actually divide the retirement account but instead uses other assets to offset one spouse’s portion of its value. Home equity or an ownership interest in a business could potentially be worth the equivalent value of someone’s share in the retirement savings.

The exact approach that each couple takes will depend on the spouses’ unique marital circumstances. Thankfully, many couples can reach an agreement that will help them avoid secondary losses while setting each of them up for as much stability as possible during their golden years. Properly valuing marital assets, including retirement savings, is often a key step toward securing an appropriate outcome for property division matters during a California divorce.