Divorce proceedings lead to major changes in people’s daily lives and finances. Plans and expenses they previously shared with their spouses now become their sole responsibility.
People preparing for divorce in California often have questions about their rights and obligations. They may have concerns about specific assets that they hope to protect.
Retirement savings may represent years of careful money management and short-term financial sacrifice. People give up living the most comfortable lifestyle possible on their income to set money aside for retirement. How can those with substantial retirement savings protect those assets as they navigate a California divorce?
Determine what may be separate
The first step to take when seeking to protect retirement savings in a California divorce is to evaluate the history of contributions to the account. California is a community property state. Therefore, any income saved and any deposits made by employers during the marriage are likely community property and subject to division. Spouses usually need to split their community property evenly.
While the account may be in the name of one spouse, any marital income used to fund the account technically belongs to both spouses. People can determine what, if any, contributions they made before marriage and protect those as separate property.
Compromise on other details
For those who feel strongly about retaining the entirety of a retirement savings account, negotiations with their spouse could help achieve that goal. As long as the overall division of property conforms with community property statutes, one spouse can seek to retain assets that they might otherwise need to split. Allowing a spouse to keep other property of equivalent value could prevent the division of a retirement savings account.
Use the right document
When the division of a 401(k) or similar retirement account is necessary, waiting until after the divorce to split the account is critical. A qualified domestic relations order (QDRO) that complies with the terms set in the property division decree is typically required.
The proper execution of a QDRO can help preserve the contents of the account. It prevents divorcing spouses from having to pay a 10% penalty or report the amount transferred to the other spouse as taxable income for that year.
Learning more about state law and unique property division concerns can be beneficial for those worried about preserving their retirement savings. Spouses who identify their priorities early in the divorce process have a better chance of securing the terms that matter most to them.