When someone is nearing retirement age, the last thing they expect is a divorce. However, it is becoming more frequent for couples over 50 to end their long-term marriage.
Understanding how a gray divorce will affect your retirement is essential to making the best decisions regarding your financial future.
Community property laws in California
When dividing assets in a gray divorce, retirement accounts are often the most complex and contentious issue. In California, community property laws govern the division of assets and debts during a divorce. This means that any property, including 401(k)s, pensions and Individual Retirement Accounts (IRAs), acquired during the marriage is considered community property, regardless of which spouse earned the funds. So each spouse is entitled to 50% of the value of the retirement funds.
Dividing retirement funds can be complicated, and the method used will depend on the type of retirement account. For 401(k)s and pensions, a Qualified Domestic Relations Order (QDRO) is typically required to divide the funds. A QDRO is a court order that instructs the retirement plan administrator to divide the funds between spouses.
For IRAs, the court can issue a “Transfer Incident to Divorce” order. This order allows the transfer of some or all of the funds from one spouse’s IRA to the other spouse’s IRA without incurring any taxes or penalties.
In some cases, divorcing couples may choose to offset the value of the retirement funds with other assets, such as the family home or other property. This can provide a more equitable distribution of marital property. Still, it is essential to ensure that the value of the exchanged assets is equal and fair to both spouses. Seeking guidance can help you navigate this complex process.