Divorce will have a profound impact on various aspects of your life, that can include your financial stability and retirement plans. California is a community property state, which means that assets acquired during your marriage, including pensions and retirement accounts, are generally considered community property and are subject to division upon divorce.
Community Property and Retirement Assets
Community property laws dictate that assets acquired during a marriage are presumed to be jointly owned.. When assessing the value of retirement accounts for division during your divorce proceedings, there are certain distinctions that must be made.
- Defined Contribution Plans (e.g., IRA or 401(k)): The process is relatively straightforward for these plans. The statement value of the account is typically considered community property if contributions were made during the marriage. Contributions made before the marriage or after the date of separation may be excluded.
- Defined Benefit Plans (e.g., Pensions): Valuing and dividing defined benefit plans is more complex. These plans are based on contributions made by both the employer and the employee to provide a specific benefit in retirement. Because the exact amount is often unknown, estimates are used. In most cases, it’s advisable to divide the plan rather than attempt to assign a specific value and offset it with other assets.
Using Retirement Assets for Offsetting
Dividing retirement assets doesn’t always mean splitting them down the middle. Sometimes, one party may want to keep a specific asset, such as the family home, but lack the immediate cash to buy out their partner. In these cases, pension assets can be used for offsetting. This requires determining the value of the pension accurately.
Separate Property Considerations
Not all retirement assets are part of the community property. Assets initiated before the marriage are typically considered separate property and may be excluded from division during a divorce. A formula is used to determine the proportion of the expected pension benefit that was earned before, during, or after the marriage.
Prenuptial agreements can significantly influence the division of retirement assets during divorce. If a prenup specifies that retirement accounts are to be treated as separate property or if it outlines specific arrangements for property division, those terms are typically followed.
Post-Divorce Financial Planning
Divorce often results in a financial hit, and retirement plans may need to be adjusted. It is a good time to reassess your financial goals and consider new strategies to rebuild your retirement savings. This may involve revising retirement age expectations or finding alternative ways to achieve financial security in retirement. Post-divorce financial planning becomes crucial to navigate the changes in your retirement plans and work towards securing your financial future.
Contact Financial Harmony, LLC
For more information regarding financial planning while going through a divorce, contact Kristine Rushing at (833) 340-2305 to schedule a free consultation. Financial Harmony is located at 7700 Irvine Center Drive, Irvine, CA 92618.