Courts take the position that anything acquired with your earnings after the date of your wedding is marital property unless you signed a prenuptial agreement stating otherwise. Retirement funds fall into this category. Technically, they're funded with money you've earned during the marriage, even if you don't yet have access to it. They're divisible in a divorce, but beyond this simple rule, how they're handled when spouses part ways is somewhat complex.
Valuing the Plan
Before any asset can be divided in a divorce, its value must be established. If your retirement account is a defined contribution plan like a 401(k), valuing it may be the easiest part of the equation – the plan statements will give you the information a few times a year. You'll need to know the plan's value as of the date of your marriage, assuming you already started the plan before you wed. You'll also need the plan's value at the time you separated or initiated your divorce proceedings. If your retirement fund is a defined benefit plan, such as a pension, the process becomes more complicated and will require the assistance of an accountant or actuary. A detailed equation must establish its present-day value based on factors such as how long you've worked and how long you're expected to live.
Depending on when you began investing in your retirement plan, the entire asset may be subject to distribution in divorce or your spouse may only be entitled to a share of a certain portion of it. If you created your 401(k) before you got married and never contributed to it again after the date of your wedding, it's not marital property and your spouse isn't entitled to any of it. Otherwise, anything contributed before your marriage or after your date of separation must be separated out, including interest and earnings attributable to those contributions. Your spouse has an interest in the balance that remains.
Division of Assets
Your spouse's interest in the marital portion of your plan can be determined by the court if you divorce by trial, or it can be negotiated if you and your spouse reach a marital settlement agreement to avoid trial. How much your spouse receives depends on state law if a court decides the matter. In nine states, community property law applies: California, Nevada, Arizona, New Mexico, Texas, Louisiana, Idaho, Wisconsin and Washington. Your spouse is entitled to 50 percent of the marital portion of your plan in these states. Otherwise, it's up to the discretion of the judge based on a variety of factors, such as the length of your marriage.
Payment of Funds
If you have sufficient marital assets and you want to keep your retirement plan intact, you can offset your spouse's share by surrendering to her other property of equal value. Otherwise, you'll have to divide the asset. Your spouse's share of your 401(k) can be rolled over into an IRA in her name, at which point she can do anything she likes with it. Any associated taxes and penalties are then her responsibility. She can also take her share in cash under the same terms. Her portion of your defined benefit plan would typically be paid directly to her at the time you retire. Under the terms of the Employee Retirement Income Security Act, both 401(k)s and defined benefit plans require qualified domestic relations orders or QDROs before a portion can be distributed to anyone but you. This is a complex, detailed document that must be approved by both the court and your plan administrator, so you'll most likely need a professional to draft it for you.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.