Planning Financially For A Divorce

Posted on December 22, 2017

Most people don’t marry with the expectation that they may be divorcing somewhere in their future. If they did, everyone would expect to have prenuptials drawn up before their wedding. (This alone could prevent plenty of marriages from happening in the first place.)

Married couples who have worked together to build a home and good life have probably have also been working toward accumulating some intangible assets for their future, such as individual retirement accounts (IRAs), pensions, retirement funds and/or Social Security benefits.

How do IRAs get divided in a divorce?

In a divorce, the court will divide all assets, to include IRAs, equitably. In many instances, IRAs that were either established or increased in value during the marriage are divided to equalize the marital estate. This is true regardless of how many, or in whose name the accounts are in. For instance, if one spouse has two IRAs, and the other spouse has one, the total marital value of all three is subject to division. Depending on how the total marital estate is divided, one spouse may have to transfer some or all of the funds in an IRA to the other spouse in order equalize the estate. Depending on the plan, a withdrawal (rather than a transfer of the funds to another qualified account), could be subject to taxes and/or penalties

How are retirement or pension funds divided when the value is not yet known?

In many cases, divorcing spouses are not yet retired, but do have a retirement or pension plan in place through their employer. It is possible to determine a value these plans at retirement based upon the current value, projected contributions and projected life expectancy of the plan participant. However, the divorcing spouse only has a marital interest in a portion of a retirement or pension account that existed while the parties were married. Any contributions made to the retirement or pension that occurred prior to the marriage, or after the issuance of a decree, are the participating spouse’s separate property. The divorcing spouse’s percent interest will ultimately be known at the time of the participating spouse’s retirement and will be calculated based upon a mathematical formula that takes into consideration the total number of months the participating spouse worked for that employer and the total number of months the parties were married during that employment. A qualified domestic relations order (QDRO) is typically required to effectuate the division of these accounts. In many instances, the plan provider has strict guidelines that must be adhered to before the division will occur.

Can a divorced spouse collect Social Security retirement benefits from their ex-spouse’s benefits?

If your marriage lasted longer than 10 years, when you turn 62 and you are single, you may be eligible to apply for ex-spousal benefits. In most instances, your ex must also be at least 62, but they don’t have to be drawing their benefits yet. Keep in mind that any Social Security retirement benefits that you begin collecting before the age of 65 may reduce the monthly benefit amount.

If you are contemplating a divorce, you should gather as much information about dividing finances as possible so you are not left in the cold. An attorney can help you get answers to your list of questions.

Source: The Street, “How Divorce Affects Social Security and Retirement Account,” Robert Powell, Dec. 15, 2017