For many couples, their retirement savings are their greatest asset. Whether it’s a 401(k), IRA, pension, or some other account, these savings are often the result of a lifetime of work. So, when a couple separates, these assets carry extra weight. Not only are they financially significant; they also represent decades of saving up for golden years together—plans that now won’t come to pass.

Splitting retirement savings can be trickier than most other assets, and it’s advisable to consult with a professional. However, you still want to be informed yourself, so that you don’t end up with unintended taxes, withdrawal penalties, or inaccurately divided savings.

Determining A Fair Division

Each state’s laws vary on dividing marital property. Some mandate “equal” while others require “equitable” division of assets. “Equal” means an even 50-50 split, and “equitable” means a fair division in the eyes on the court. For example, a judge might decide it’s fairest to award one spouse more than 50% of the marital property.

In pursuit of an equal 50-50 split, most divorcing couples divide and balance marital property based on the items’ current fair-market values: cars, house, etc. This seems fair, however a retirement account like a 401(k) is tied to the stock market. Its value fluctuates, so it’s worth will change after any agreement is made.

TIP #1: Agree with your ex-spouse on a percentage of retirement accounts rather than a fixed dollar amount [i.e. 50% rather than $50,000 of a $100,000 401(k)].

When deciding how to divide retirement savings fairly, the general rule of thumb is that a spouse is entitled to 50% of their partner’s retirement for the years that they were married. So, if a woman worked and paid into a retirement for 10 years before marrying, then worked and paid into retirement for another 10 years while married (but before divorce), her spouse would be entitled to 50% of the second 10 years, or 25% of the retirement savings’ full 20 years.

Finally, equal and equitable division of marital assets doesn’t mean that each asset must be split down the middle. Courts often allow spouses to trade assets as long as the end ledger balance is fair to both partners. So, it’s possible for a spouse to hold onto their entire retirement savings, if the other spouse wants to hold onto another asset they both agree is equal in value. In some cases, both spouses have retirement savings that are roughly equal, and the two partners simply agree to keep their own accounts.

Submitting the Correct Documents

Courts make rare exceptions for retirement savings in the case of divorce—allowing spouses early access to accounts without penalties—but only if the right documents are filed for your type of accounts. 401(k) accounts are divided under the “Qualified Domestic Relations Order” (QDRO), while IRAs are split using a “transfer incident to divorce” (transfer incidents).

It’s critical that you and your spouse submit the correct documents to the court; if you and your spouse have multiple retirement accounts, each one requires its own QDRO or transfer incident. If your assets aren’t listed correctly on the divorce (or separation) agreement, you won’t receive the lenient withdrawal exceptions the law allows.

TIP #2: After retirement assets are transferred, remember to update your account’s beneficiaries (as your ex-spouse will most likely no longer be a beneficiary).

As the most valuable assets for most couples, it cannot be overstated how crucial it is to file the correct documents for your particular retirement savings. Failure to do so could potentially mean that you owe regular income taxes on the money, as well as being hit with a 10% early withdrawal penalty (if you’re younger than 59.5 years old—the age when someone can begin withdrawing from traditional IRAs without penalty).

In addition, incorrect filings could prohibit rolling over funds from one retirement account to another because it would be an ineligible transfer. You or your ex-spouse would then lose the benefit of deferring taxes on that amount until you withdrew it later in life (as well as be required to pay taxes on it now as ordinary income). Even if you misfile in accident, the value of your divided assets would be less, and it would violate the agreement with your spouse (who may then ask for compensation).

Splitting retirement savings during a divorce can seem complicated, but with due diligence and professional help, you can divide your accounts cleanly, fairly, and legally. For more information on splitting your retirement accounts and filing all the correct documents—as well as reducing the stress that goes along with it—contact South Bay Mediation.