When California spouses decide to divorce, they might be concerned about affecting their retirement plans. Divorce has a range of financial consequences, but some of the most impactful can involve retirement accounts. These funds are often some of the largest assets held by married couples, and they are often divided in half between the two parties, especially if a long-term marriage is involved. Even if retirement is still years away, divorce may spark serious thinking about how to escalate retirement savings in order for people to protect themselves for the time to come.
While Individual Retirement Accounts (IRAs) have “individual” in their name, they are generally considered marital property. If the IRA existed before the marriage, it may be only the increase in value during that time that is up for division in the divorce. The same is true for pension plans, 401(k)s and similar accounts. There are a number of special rules that apply to the division of retirement accounts in a divorce. For example, people could face hefty tax bills and other penalties if the accounts are divided incorrectly.
A Qualified Domestic Relations Order (QDRO) is a specialized court order necessary to divide pension plans or 401(k)s under a divorce. Since the divorce decree itself is insufficient, the QDRO provides specific instructions on how the division should be accomplished in order to avoid unnecessary penalties. The QDRO can be drafted by one spouse’s family law attorney and must be approved by the court. If more than one pension plan needs to be divided, a separate QDRO is required for each retirement fund.
Couples who are thinking about divorce may need to consider the effect on their retirement funds. A family law attorney could help someone to negotiate a fair agreement on property division and other key issues.