Many people believe that when a couple gets divorced, the assets within a retirement account belong to the spouse whose name is on the account. This is a common misconception that stems from the idea that these are “individual” retirement accounts and therefore should remain with the individual who opened them.
In actuality, personal retirement accounts will usually be awarded to both spouses during a divorce, although this is not always the case. In addition, there are specific procedures that must be followed in order to properly divide retirement assets in a way that ensures that both spouses receive what they are entitled to without exposing them to tax penalties.
When are Both Spouses Entitled to the Assets in a Retirement Account?
In general, personal retirement accounts that were opened after a couple was married are considered marital property and therefore, the entire account is usually included in the division of assets. The only exception would be if you had a prenuptial or postnuptial agreement that explicitly states that the retirement account remains entirely with one spouse or the other.
When one or both spouses bring retirement accounts into a marriage, things can get a lot more complicated. In such cases, whatever assets were in the account prior to the marriage are usually considered nonmarital property, and any assets that were added and/or accumulated during the marriage are considered marital property.
For example, let’s say you opened a 401(k) account with your employer while you were single, and it was worth $50,000 at the time you were married. After several years of marriage, the value of the account grew to $250,000. In this scenario, unless there are agreements to the contrary, both spouses would be entitled to only the $200,000 that was accumulated during the marriage, and $50,000 would remain with the spouse who opened the account.
Defined contribution plans like 401(k)s and IRAs are relatively easy to calculate in these situations, but this may not be the case with defined benefit plans such as pensions. Defined benefit plans are based on complex calculations that make it more difficult to value and divide during a divorce. In addition, government and military pensions (of which there are many here in South Carolina) are different from private pension plans, and they have special rules with regards to how long a couple has to be married before a spouse is entitled to a portion of the plan.
How are Retirement Plans Divided in South Carolina?
As we touched on earlier, you will need to follow specific rules and procedures in order to ensure that any personal retirement plans are divided properly. If you are younger than 59 ½ and dealing with an individual retirement account (IRA), you would need to roll half of the money in the account (or whatever amount that is agreed upon) over to your spouse’s IRA in order to avoid a 10% IRS withdrawal penalty. If you simply withdraw the money and write a check to your spouse, the withdrawal penalty would be triggered.
If you are dealing with a 401(k), pension, or any other employer-sponsored plan, you will most likely need a qualified domestic relations order (QDRO). A QDRO is a court order that must be drafted using precise language that is approved by both the court and the retirement plan administrator. This document protects the rights of the spouse who does not own the retirement account by ensuring that the terms and conditions of the divorce decree (with regards to retirement accounts) are carried out. It is important to note that QDROs are not applicable to military and government pensions as they are governed by other rules.
Another thing to keep in mind when dealing with the question of dividing a personal retirement account during a divorce is that there may be better solutions for handling this. South Carolina is a fair and equitable distribution state, and this means that assets do not necessarily have to be divided exactly 50/50, the division of property must only be seen as “fair and equitable” by the court.
So, when it comes to a retirement account, it might be beneficial for both spouses if they to do some kind of trade-off in order to avoid having to divide the account in the first place. Using the example from earlier, if the couple has a marital home with $225,000 in equity (along with $200,000 worth of marital assets within the retirement account), it might make sense to let one spouse keep the home and the other spouse keep the retirement account along with a used vehicle or another asset that has some value.
In situations like these, it is very important to work with an attorney who has an in-depth understanding of all of these potential issues and the ability to develop creative solutions designed to fully address your specific circumstances. By having skilled legal counsel in your corner, you will be in the best possible position to secure an outcome that protects your interests and makes the most sense for all parties involved.
Contact Our Knowledgeable and Compassionate Spartanburg, SC Lawyers for Assistance
If you are facing a divorce in South Carolina, The Nowell Law Firm is here to help. Message us online or call our office today at (864) 469-2481 to schedule a personalized consultation with a member of our legal team. We look forward to serving you!