The Division of assets that takes place in a divorce can definitely make you feel less financially stable. A change to your financial status may mean that you go from being a homeowner to a renter. Because the parties will be paying expenses for two households on the same income that they previously supported just one household, both parties will have less expendable cash.
While these changes are certainly stressful, there is a much more important issue in your future and that is “what divorce will mean for your retirement income.” You may have spent years putting aside money from every paycheck with the hopes of retiring and traveling with your spouse. Now, you will have to rework your retirement plans and perhaps retire with less retirement income or work longer than you originally planned.
Will you really have to split your retirement as a result of the divorce – it depends?
A good portion of the account is probably community property
A Judge can only divide community property, however, most likely your retirement funds were accumulated during the marriage and are thus community property. If you have inherited retirement funds, and you can prove that they are 100% inherited funds, then those funds will be confirmed as your separate property and left to you alone.
It does not matter which of the spouses contributed to retirement. If the funds were accumulated from earnings during the marriage, then they are community funds and are subject to division by the Court. The silver lining to the division of retirement funds is that a court-approved qualified domestic relations order will divide a retirement account without any taxes, penalties or fees being assessed, so long as those funds are deposited into another retirement account and not taken out as a cash withdrawal.
When can you avoid splitting your retirement funds?
In some cases, the spouses may have executed a prenuptial or postnuptial agreement that clearly delineates what will or will not be divisible on divorce. If, in your prenuptial or postnuptial agreement, you designated existing retirement funds as well as future contributions, interest and dividends for those same retirement accounts as separate property and not divisible on divorce, then you have taken the strongest step possible to protect those assets from division in divorce.
Spouses often times will negotiate a settlement wherein they retain their entire retirement account but that will normally be in exchange for the other spouse taking an equivalent valued account or item. Generally, if spouses reach an agreement that is clearly set out in an Agreed Final Decree that they both sign, the Court will approve the property settlement arrangements, even if those arrangements deviate from what the Court would have done if the Judge had made the division as the result of a final trial.
Identifying the assets and concerns that matter most to you now and for your future will help you prepare for the property division process and will help you make smarter decisions regarding the same.