As couples who have spent years combining finances during marriage plan to dissolve their unions, it’s essential to understand how retirement assets are handled in the event of a divorce or separation.
Retirement accounts represent years of hard work and diligent saving aimed at securing one’s financial future. However, in the event of a marriage dissolution, these assets can become subject to division. Understanding the rules and regulations surrounding the division of retirement accounts is essential to safeguarding one’s financial well-being.
Marital property and division
Any funds contributed to a 401(k) account during the marriage are generally considered marital property and are subject to division during divorce proceedings. This means that both spouses typically have a claim to a portion of the 401(k) assets accumulated during the marriage. In Wisconsin, the division of a 401(k) account during divorce is governed by the community property principle. This means that the assets in retirement accounts are generally divided 50/50 between divorcing couples.
Considerations in dividing retirement assets
The division of retirement accounts often requires the implementation of a Qualified Domestic Relations Order (QDRO). A QDRO is a court’s decision that outlines the division of retirement benefits between divorcing spouses. The order establishes the ex-spouse’s legal right to receive a portion of the retirement benefits accrued by their former partner during the marriage.
The order should outline the specific benefits or payments to be allocated to the alternate payee (the ex-spouse) and the method of distribution, whether through a:
- Lump-sum payment
- Periodic payments
- Direct transfer to an individual retirement account (IRA)
Moreover, transferring funds between retirement accounts as part of a divorce settlement does not trigger tax consequences if an individual’s ex-spouse is awarded part of the account, provided that the right documentation is in place. Divorcing couples should also know that determining the value of retirement accounts requires careful evaluation, especially because the value of assets held in investment accounts fluctuates with the variations in the stock market.
By understanding the legal landscape and following the proper procedures, divorcing couples can more effectively navigate the division of retirement accounts and help ensure a fair division of assets. Seeking legal guidance can ensure that everyone’s rights and interests are protected throughout the divorce proceedings.