Errors to avoid when dividing a retirement account
For some couples in California, a retirement account could be their largest asset. Therefore, dividing the account in a divorce could be quite contentious. In a 2016 survey, the American Academy of Matrimonial Lawyers found that separating retirement accounts was the second most common cause of conflict in a divorce.
Couples dividing a retirement account must take steps to avoid taxes, penalties and unfair distribution. One common error is to write out the amounts in dollars instead of percentages in the divorce agreement. This fails to account for the possibility that the value of the account might fluctuate. A person who expects to receive a distribution from the retirement account should wait until after the divorce to agree to being removed as a beneficiary on the account. Otherwise, if the account holder dies before the divorce is final, the spouse may receive nothing.
To divide a 401(k) or pension plan without paying a penalty or tax, the couple will need a qualified domestic relations order. This is a court order that has to be approved by the plan administrator. With an IRA, a QDRO is not necessary, but the distribution has to be rolled over into another IRA. A 401(k) distribution can be rolled into an IRA or taken as a direct distribution.
In California, dividing marital property can mean separating most or all assets and debts acquired since marriage. However, this does not necessarily mean that the couple must divide everything 50/50. They may be able to work out an arrangement where they trade different assets that have roughly equal value. Legal counsel could help during this process.