Focusing On Family Law – And You
Divorce often impacts your finances, but this may be more of a concern if you are going through a gray divorce. This is generally defined as a divorce when you are over the age of 50.
A gray divorce can have a bigger effect on your finances. We typically accumulate more assets, such as retirement funds, as we get older, which means we have more to lose when we divorce over 50.
Additionally, gray divorces usually involve couples who have been married for many years or decades and have acquired many assets together over the years.
California’s community property law
Any divorce involves splitting marital property. California is a community property state, which means that marital property is generally divided equally.
Although your retirement accounts might be held in your name only, there is still a chance they are a marital asset if the funds intermingle with marital funds.
Money that is deposited into your retirement accounts when you are married may convert the retirement accounts into marital assets. If you withdrew any money from your retirement accounts during your marriage and used it for something marital, such as a vacation with your spouse, that could also convert the account to a marital asset.
Since the goal is usually an equal division of marital assets, you and your spouse can both decide to keep your retirement accounts if they are of relatively equal value. However, if one spouse has a significantly higher amount in retirement savings, they may be required to transfer funds to the other spouse’s retirement account.
Qualified domestic relations orders
You are typically taxed on funds that you remove from retirement accounts. To avoid this when you must make a transfer during a divorce, you can use a qualified domestic relations order (“QDRO.)”
A QDRO is a special form used to transfer the funds and avoid tax penalties. The funds must go into another retirement account to avoid the penalty.
Each QDRO is unique and comes with specific instructions and requirements depending on the retirement plan administrator. It is important to carefully follow these instructions since one error could cause the QDRO to be processed incorrectly and lead to tax penalties.
QDRO’s only apply to certain types of retirement accounts. For example, they normally apply to 401K’s but do not apply to IRA accounts.
If a QDRO does not apply to the type of account you are dividing, there are usually other methods available to avoid tax penalties, such as a direct rollover.
Pensions and Social Security
The division of a pension can be more complicated. Courts usually consider the portion of a pension that was earned during the marriage a marital asset and a spouse would be entitled to a portion of that.
Pension divisions can involve a complex mix of factors including pension plan rules, California state laws and whether pension payments have already been distributed.
Remember that the goal is an equal split. This can be accomplished without dividing each retirement asset separately.
If there is another marital asset, such as a home, of equal value to a retirement account, one spouse could keep the home while the other keeps the retirement account. This results in an equal split without having to divide a retirement account.
Social Security laws are more straightforward than retirement account laws, which can make this piece of divorce slightly easier. If you were married for at least 10 years before divorcing, your spouse can apply for benefits worth 50% of your retirement age benefit.
