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How Are Retirement Accounts Divided in a Divorce?

Posted by Furman & Zavatsky | May 07, 2022 | 0 Comments

In many California divorces, pensions and other retirement accounts are often the highest-value assets, including IRAs and 401ks. The funds in these valuable accounts quickly become a primary target when assets are divided in a divorce proceeding. Pensions and retirement accounts are similar to other types of assets as they will fall under the umbrella of separate property or community property, also commonly known as “marital property.”

How Are Retirement Accounts Divided in a Divorce?
In a divorce, division of pensions and retirement assets can become complex.

However, these divorce assets will be subjected to some unique considerations and requirements discussed below. If you possess substantial retirement assets and are getting a divorce, then you would be wise to start careful planning to protect your legal interest in these assets.

Some spouses will consider taking a distribution from a retirement account to pay for routine expenses during the divorce process. However, if you are under 60 years old, there are often tax penalties for the distribution, which can be substantial. Readers should note there are other methods of dividing retirement assets without tax consequences.

The division of retirement accounts in California divorce can become a long and complex process. For instance, a retirement account from a government agency will require special consideration when spouses divide the assets.

Further, some retirement plans require the account to be “joined” in the divorce proceeding. To give you more helpful information about dividing your retirement assets in a California divorce, our Los Angeles family law lawyers will discuss more details below.

What Are the Different Types of Retirement Plans?

As noted above, retirement benefits are frequently the most valued asset during a California divorce. Thus, an accurate calculation is essential for dividing community property, including pensions.

Most people know that spouses share such community property equally in a divorce. Further, the interest is based on the accrued benefits of the plan from the date of the marriage to separation. The most common retirement benefits that will be subjected to community property division include the following:

  • 401(k) plans,
  • 403(b) plans,
  • 457(b) plans,
  • Traditional IRA,
  • Roth IRA,
  • SEP plans,
  • Simple IRA,
  • Simple 401(k),
  • ERISA funds,
  • Keoghs,
  • SARSEP plans (salary reduction),
  • Payroll deductions IRAs,
  • Profit sharing plans,
  • Defined benefit plans,
  • Defined contribution plans,
  • Money purchase plans,
  • Employee stock ownership plans (ESOP),
  • Multiple employer plans
  • Government plans,
  • Military pensions,
  • Veteran's educational benefits.

Readers should note that social security retirement benefits and workers' compensation disability awards are not considered community property. Spouses should deal with dividing the retirement benefits in their marital settlement agreement or the final divorce judgment.

What is a Qualified Domestic Relations Order (QDRO)?

Qualified Domestic Relations Order (QDRO)
A QDRO is often required and will outline how retirements assets are distributed.

So, the discussion above leads us to the main question: How are retirement plans divided in a divorce? One aspect of making pensions and other retirement accounts unique from other forms of community property is that they will involve a third-party administrator.

Dividing retirement plans through a divorce is separate from the traditional divorce proceedings, and it will require completing other court forms.

A Qualified Domestic Relations Order (QDRO), Form FL-460, will outline how each spouse's retirement assets that are distributed in a California divorce. Readers should note that spouses don't file QDRO until a divorce judgment lays out details for the retirement plan division.

A community property interest in retirement plans is usually split equally 50/50 between spouses, but an agreement for different amounts could be reached. For instance, spouses could agree to award a specific dollar amount to a different percentage of the plan.

Despite any mutual agreement, divorcing spouses must file a QDRO to show how the retirement plan will be divided according to their marital settlement agreement. The QDRO is the official court order directed to the retirement plan administrator about the division of benefits.

With some types of retirement plans, obtaining a QDRO will require “joining” the plan to your divorce. Some examples of plans that require this joinder to get a QDRO to include California State government plans such as the Public Employees' Retirement System (CalPERS), the Teachers' Retirement System (CalSTRS), and the Federal Civil Service Retirement System (CSRS). Further, the family law courts will require a QDRO to divide the following types of retirement benefits:

  • 401(k) plan,
  • 403(b) plan,
  • Employee stock ownership plans,
  • Profit-sharing plans,
  • Any tax-sheltered annuities

Proper preparation and completion of the QDRO paperwork are essential and often require legal assistance. Our law firm does not prepare QDRO's, rather they are prepared by actuaries or companies who specialize in this documentation. We can assist you with a referral. There are some retirement benefits that spouses can divide without using the calculations of a QDRO. For instance, spouses can distribute a defined contribution plan based on a simple “buy out.”

Another option is to provide the spouse who was not working with a certain percentage of the ex-spouse's monthly pension check, calculated by dividing the number of years married by the spouse's number of years in the pension plan.

What Are Your Options for Dividing Retirement Plans in a Divorce?

Options for Dividing Retirement Plans in a Divorce
There are several options for divorcing spouse's to divide their retirement accounts.

You do have some standard options that you can use as an alternative to dividing retirement plans in a California divorce. For example, a spouse could take their retirement contribution and waive community property rights to their spouse's retirement plan.

This option can be worked out in a mutual agreement with your spouse in the final marital settlement. This is a fairly standard arrangement when spouses have remained civil and friendly in the divorce process. Let's review this standard option further.

Suppose each spouse has their 401k retirement account through their employer.  They could mutually agree to keep their retirement accounts rather than divide them in half with their spouse. In some cases, where one spouse's retirement account is much larger, they could reach an agreement where the other spouse receives a more significant share of the community property assets.

Readers should note that a QDRO is no longer necessary if one spouse decides to waive their right to their spouse's retirement plan. Instead, a copy of the divorce judgment should be sent to the retirement plan administrator, showing that the waived interest is usually community property. Another option for avoiding dividing retirement assets is to list their kids in their will as the beneficiary of their retirement accounts. Still, this option has potential issues if the spouse decides later to change the will.

What Forms Are Required to Divide Retirement Benefits in a California Divorce?

Readers should note that retirement plans need a Qualified Domestic Relations Order (QDRO) to process dividing a retirement account with the plan administrator, but not all accounts will require a formal joinder to the divorce proceedings. Typically, government city and county retirement accounts will require a joinder.

After processing the QDRO, the plan administrator sets up a new account for the other spouse who is not on the plan. Dividing retirement benefits by QDRO in a California divorce will not include any tax penalties for an early withdrawal. The forms below can “join” a retirement plan in divorce proceedings. These are necessary to receive an official court to divide retirement benefits in a California divorce:

You will also need a Qualified Domestic Relations Order, but every retirement plan has its requirements for completing a QDRO.

What Are the Benefits of Joining a Retirement Plan?

In some cases, a spouse might want to formally join a retirement account even when a joinder process is not required. After a retirement plan has been officially joined in a divorce proceeding, the plan is placed on hold until it can be divided between spouses.

This means a spouse won't be able to make a withdrawal or “cash-out” the value of the plan. Further, a joinder alerts the plan administrator there might be a community property claim upcoming against these benefits.

Divorce Decree in California
Contact our law firm for help with your divorce and dividing marital assets.

Finally, joining the plan also prevents a party from obtaining a loan against those benefits, withdrawing part of the cash value, or cashing out the value of the plan. If you need more information about dividing your retirement accounts in a divorce, contact a family law attorney familiar with the process.

You might need to formally contact the plan administrator to get the information to join your spouse's retirement plan formally. There are legal forms that must be prepared to divide the plan in your divorce judgment.

With the help of our skilled family law attorneys, you can better protect your assets, including your retirement savings. The divorce and family law attorneys at Furman & Zavatsky provide legal representation to help people obtain the best possible outcome for their divorce.

Our Certified Family Law Specialists are located in Los Angeles County, and we serve people across Southern California. We offer a free case consultation by calling (818) 528-3471 or filling out the contact form.

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