When a couple gets a divorce, many assets may be split either equally or in an equitable fashion. In most cases, retirement accounts such as an IRA or a 401(k) may be split at the end of a marriage. How much would each person get, and when would such a split take place if applicable?
Is the Money Sole Property or Marital Property?
It is possible that portions of a retirement account or a particular account may be considered sole property. For instance, if you already had $100,000 in a 401(k) before you got married or had an IRA that you solely contributed to before and during the marriage, that money may be exempt from division. However, any contributions or any growth based on contributions to an account after the marriage occurred would generally be considered joint property.
Is There a Prenuptial Agreement In Place?
A prenuptial agreement is essentially a customized divorce contract. It can bypass state laws regarding property division such as how retirement accounts are to be divided. For instance, you could create an agreement stating that your spouse isn’t entitled to your retirement account or that retirement funds will be split only if the marriage lasts for 10 years or longer.
Before agreeing to a prenuptial agreement, it may be a good idea to bring it to an attorney. An attorney may be able to determine if it is valid and can be enforced. If the agreement is not valid, state law may apply as to how such an asset is split.
Reasons why an agreement wouldn’t be valid include forcing a person to sign under duress such as the night before the wedding. It may also be invalid if it contains unreasonable terms that can’t legally be enforced in a given jurisdiction.
When Will the Money Be Divided?
Timing plays a big role in how a retirement account is to be split. In some cases, a spouse may want access to the money right away. However, this may result in income taxes owed as well as a 10 percent penalty if that person is under the age of 59 1/2.
Therefore, it may be preferable to wait to split that money until after age 59 1/2 or ask that any distribution be split according to the agreement when that distribution takes place. It may also be possible to conduct what is called a qualified domestic relations order (QDRO).
This makes it possible to transfer money from one spouse’s retirement account to the other spouse’s account without incurring any taxes or penalties. Once the money is transferred, it is considered that account holder’s property to do what he or she wants.
Divorce can be emotionally and financially painful for all involved. Therefore, it is worthwhile to end the process as soon as possible. Consulting with an attorney may make it easier to determine whether or not money inside a retirement account can be divided and how much each person may be entitled to from the other spouse.