You and your spouse both worked full-time jobs for years. You both have retirement accounts that were meant to contribute to your nest egg – but now you are facing divorce.
Worries about retirement plans can be significant for divorcing spouses nearing 50 and those beyond this age. However, if you both have separate employment based-retirement accounts, you may wonder: is it possible to simply keep your accounts as you begin to divide property?
First: Retirement accounts are marital property
The value that your 401(k) or another type of retirement account accrued during your marriage is indeed marital property under North Carolina law. Even if you were the only one contributing to it, the law views retirement funds as property both spouses share and, in turn, have a right to when you file for divorce.
Even so, that does not automatically mean that you must divide your accounts between the two of you. There are certain circumstances when you may be able to keep them.
Can you keep your separate retirement accounts?
The answer to this question depends on several factors. For example, you will have to consider:
- The amount in each account: If your retirement accounts are of similar value, then it may make more sense for you and your spouse to agree to keep your own accounts. If the values of these accounts – and each spouse’s potential earning capacity – vary greatly, then one spouse may move to divide one account to obtain an equitable division of marital assets.
- The other assets and debts in the marital estate: If one spouse is retaining other assets which offset the value of the retirement or the difference at issue, then a division may not be necessary or equitable. It is important to keep in mind that the present-day value of retirement assets is not the same as the present-day value of other marital assets due to the tax consequences and deferred nature of a spouse’s ability to use the funds, and this must be taken into account when analyzing the overall property division.
- Your approach to divorce: As we have discussed in previous blog posts, the procedure you choose to resolve your divorce will also play a role in determining the options you have. For example, if you go to court, then the presumption that an in-kind division of liquid and retirement assets will apply. However, if you choose to work it out yourselves or go to mediation, then you and your spouse could agree to keep your own accounts, even if they are marital property.
Generally, whether you divide the accounts or not will boil down to the ability of you and your former spouse to reach an agreement.
Regardless, dividing retirement accounts is complex
Dividing retirement accounts requires great care and understanding of the rules to ensure you avoid tax penalties. For example, employment-based retirement accounts will require a Qualified Domestic Relations Order (QDRO), to establish an ex-spouse as an “alternate payee” of one’s retirement account. Other types of accounts which are not qualified plans may still require a Domestic Relations Order, IRA Transfer Order, specific transfer forms, or letters of instruction to properly divide. A family law attorney with specific experience handling the retirement assets at issue is preferable for a full understanding of your options and the proper procedure for handling the division of these assets. Competent advice can help you carefully evaluate your finances and the options available to you to decide how you will move forward and protect your retirement years.