Retirement assets are assets with benefits you don’t intend to use now. Or an asset you intend to liquidate during its maturity where the value is highest. If you’re liquidating because of divorce, you may want to leave out retirement assets. Retirement assets may be worth less if liquidated before their maturity. You have to find smart ways to divide retirement assets during divorce.
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Liquidation of retirement assets or securities is a taxable event. You may get less than its maturity values. Taxes and early withdrawal penalties will eat up portions of its gross value. The best approach is to keep the retirement assets. Give another asset or lessen the debts of the other party.
Both in the short and long terms, divorce can be financially catastrophic. Instead of one household, two must be supported by the same amount of combined revenue. Divorce can alter your ability to pay income taxes and qualify for health insurance.
Most individuals tend to concentrate on finding ways to get by from one paycheck to the next. Protecting your retirement savings is just as important.
After retiring, many people continue to live for at least 15 or 20 years. It might not seem fair to have to give away half of your retirement savings upon divorce. You dutifully put money into your retirement account while your spouse frittered away that much of their income. Take that bitter pill because that account is marital property.
What are retirement assets?
Retirement assets or retirement accounts are a form of savings intended to serve an individual’s retirement. An individual retirement account or IRA is a type of pension. It is offered by numerous financial organizations to get tax advantages for retirement savings. IRA is a trust created to manage investment properties paid for by a taxpayer’s income. IRA was created for the taxpayer’s potential retirement benefit. IRS Publication 590, Individual Retirement Arrangements explains the IRA. IRA is an individual retirement account. It is a specific kind of individual retirement arrangement (IRA). It is an Individual retirement annuity. The taxpayer buys an annuity contract or an endowment contract from a life insurance firm. These are employer-established benefit trusts. The most common and most popular is the 401(k).
Aside from 401(K) are some other pensions, employee stock ownership plans, and profit-sharing plans. Other examples of these are 403(b), 457, and 409A.
Are retirement assets part of marital property?
The law governing divorce property in Michigan is MCL 552.28 and MCL 552.501. These laws allow for the split of assets accumulated during the marriage. Retirement accounts are considered property. The marital share is divided up if the account’s value increased during the marriage.
Similar to your home and bank accounts, retirement funds may be considered marital property. They must be divided between spouses in the event of a divorce. The guidelines for separating retirement savings, however, can be complex. When spouses divorce, both state and federal tax regulations may have an impact on how and when assets are split.
Most retirement accounts are created with the intention of being hidden away. You tuck it away until you retire or reach a specific age. You will incur heavy fines from the financial institution if you take the money from the account before the deadline. As long as you wait to withdraw from these funds until after retirement, the government normally does not tax them. The interest in the account will be taxed if you do an early withdrawal. When combined, these fines and taxes can deplete a person’s retirement savings almost entirely.
The National Defense Authorization Act. For those in the military service, the act added a Federal provision. Congress passed the act in December 2017. The provision preempts all state laws on military divorce. It sets forth the requirements for managing military pensions. The pension must be distributed equally among spouses under the new rule. On the day of the court order, it is split as though the military officer had retired.
In the new provision, the benefits of the military spouse that accrued at the time of divorce are divided. The new provision does not classify the entire benefit earned upon retirement between the two spouses as a marital asset. Any pension that the military spouse accrues after the divorce is recognized as separate property.
How will these retirement assets be divided in a divorce?
In Michigan divorces, judges and parties have a number of alternatives when it comes to dividing retirement accounts. Several possibilities include:
[ a ] Each spouse could maintain their 401(k) intact. They could leave the other spouse’s account alone. Both spouses should have 401(k) accounts and the value of those accounts is about equal.
[ b ] When the value of the accounts differs, the party with the higher 401(k) balance may incur more debt. The other party with the lower balance may be awarded other marital assets in an amount equal to the difference.
[ c ] The 401(k) account could be divided between the parties using a Qualified Domestic Relations Order (QDRO). This creates a second 401(k) account for the non-employee spouse.
[ d ] The parties could liquidate the 401(k) account to settle any outstanding debts. Please be aware that choosing this option can result in fines and taxes. It can reduce the account’s balance.
All retirement savings are divided in a divorce, according to Michigan law. This includes 401(k), 403(b), IRA, and other comparable eligible retirement accounts. Regardless of who earned the money or assets before the marriage, they are all deemed to be marital property. They are all subject to equitable distribution in the event of a divorce. This indicates that the account will be shared equally following divorce. This is regardless of whether the retirement assets are titled in the names of both parties or just one.
This only applies to the retirement accounts’ joint portion. This means that the balance of the account as of the date of the marriage will not be divided. You are the account holder. You should provide documentation to verify the date of your marriage.
The USFSPA governs the division of retirement accounts among military service personnel. The “10/10 rule” governs the funds received from the Department of Finance and Accounting (DFAS). A person receiving funds must adhere to the requirements of the USFSPA. This requirement states that the couple must have been together for at least 10 years. The military member must have served on active service for 10 of those years. Spouses are not entitled to payments from DFAS if couples are not married for ten years. Or, if the serving spouse has not served for ten years.
A person may still be qualified to receive a portion of their spouse’s military retirement pay. It should be specified in the divorce agreement. Establishing the 10/10 rule, the USFSPA also gives each state the freedom to enact its own laws. It allows for the consideration of military retirement benefits when splitting property. A 50/50 split is not always guaranteed in Michigan. Courts work to divide marital property in an equitable manner. A person can receive a share of their ex-military spouse’s benefits as part of the divorce settlement. They can receive up to 50% of the overall retirement payout.
Is there a way to protect my retirement assets from the property division?
You may be able to keep a part of a retirement account for yourself if it qualifies as separate property. In divorce cases, courts usually do not distribute separate property. You can learn more about those circumstances from your Michigan Divorce attorney.
Retirement accounts and any profits or growth are separate property if you had a job before getting married. This is also true if you had an old retirement account. An account you did not contribute to after getting married or rollover into with your new employment. There will be no claim on the asset by your spouse.
The court will see monies in a 401(k) retirement account as marital property. Marital assets will always be partitioned in divorce. It will be unless a pre or post-nuptial agreement specifies otherwise. The other spouse should expect to receive half of the funds from the 401(k) if just one spouse has one. The court may simply permit each party to maintain their account. This can happen if both spouses have their own 401(k) accounts and the balances are about equal.
Spouses can use collaborative law or mediation to develop their own plans for dividing 401(k) assets. They should submit the arrangement to the court. In cases when one spouse has a 401(k) and the other does not, couples can also construct agreements. The non-account holder can get another asset. The asset or assets should be in an amount equal to the other spouse’s 401(k) balance. Use a Qualified Domestic Relations Order or QDRO in this situation with your 401(k). The use of QDRO after a divorce is one of the rare situations when 401(k) account holders can withdraw money from their accounts. They can do it without incurring penalties.
Create your own IRA. Get it before the divorce is finalized. Deposit retirement assets you get from your spouse into tax-deferred retirement accounts. This will help you to avoid penalties. Cashing out could provide you with money in the short term. Invest it in a tax-deferred retirement plan. It will increase your financial stability in the long run considerably more.
When talking about the division of retirement assets in a divorce remember this:
[ a ] Retirement account contributions made throughout the marriage, along with an increase in those contributions, are regarded as marital assets.
[ b ] An individual retirement account (IRA) distribution may be stipulated in a divorce judgment or a court-approved property settlement agreement.
[ c ] A “qualified domestic relations order” (QDRO) is necessary to divide qualified plans like 401(k)s.
[ d ] State law can be overridden by a legitimate prenuptial or premarital agreement, but a spouse may contest the arrangement and can have it declared invalid.
Going through a divorce is stressful. You’re ending an important relationship. The court is about to divide your assets and properties. You worry about your financial well-being after the divorce. You may even be justified in feeling resentful. Imagine having to “share” your retirement savings. Sharing it with someone you may not think deserves it. Get a better perspective by talking to an attorney about your retirement accounts. Your attorney may just have a way around your apprehensions.
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