Divorce and Retirement Benefits in California
People are living longer nowadays, and more people are starting to save for retirement earlier so that they can support themselves in later years. As a result, retirement savings can be one of the biggest assets a married couple has - particularly as they grow older. When a couple divorces, therefore, both spouses need to understand how the law treats their retirement funds during the property division process.Retirement Benefits Are Marital Property
In California, any income that either spouse earns during a marriage is considered shared marital property. Defined contribution retirement plans like 401(k), 403(b), or 457 accounts, as well as IRAs or SEPs, are also marital property because deposits to these accounts are made from marital funds. Likewise, pension plans are also considered marital property.
A divorcing spouse who opened a retirement account prior to marriage may be able to claim his or her pre-marital contributions to the account as separate, non-marital property to prevent division with a former spouse. Unlike some states, California law also treats interest earned on pre-marital contributions to a retirement plan as separate property.Defined Contribution Plans
Defined contribution plans are governed by federal law, including how payments from these plans are made in the event of divorce. If a divorcing couple has a defined contribution plan as part of their divorce settlement, the court will need to issue a Qualified Domestic Relations Order in addition to the divorce decree. A QDRO authorizes the plan administrator to make payments to the non-employee ex-spouse.
In addition to allowing plan administrators to distribute funds to the account holder's ex-spouse, a QDRO also permits the ex-spouse to withdraw funds from the account and deposit them into different retirement accounts without incurring any of the penalties usually associated with early withdrawals from retirement funds.
QDROs are only effective with regard to retirement plans that are covered by a federal law called ERISA. Thus, a QDRO will not distribute assets from nonqualified plans such as stock options, supplemental executive reimbursement plans and excess benefit plans.Other Retirement Benefits
IRAs and SEPs do not require a QDRO to effectuate the court's division of assets. However, unless the divorce decree contains language specifically stating that any withdrawals and transfers by the ex-spouse are in accordance with Section 408(d)(6) of the Internal Revenue Code and are therefore tax-free, the spouse who withdraws money from the accounts will end up paying not only early withdrawal penalties, but also income taxes on the money he or she withdraws.Talk to an Attorney
Dividing retirement assets during divorce involves several complexities, and people unfamiliar with the process can easily make mistakes that may negatively affect their finances for years to come. Therefore, people going through divorce should seek the assistance of an attorney with broad experience in complex property division matters to guide them through the process.