You have to deal with a lot of things when going through a divorce in Arizona, including the division of assets and debts. For many, assets include retirement accounts. It can seem very unfair that you have to split assets, but the division of marital property is not always equal. Because of this, many people in Arizona are wondering what happens to retirement funds in divorce?
If you are considering divorce, the Arizona retirement system may be one of your biggest concerns. You may assume that your ex-spouse would not have access to the funds in your account, but this is often far from the truth. Understanding how the Arizona retirement system works and what happens to your accounts in a divorce is important for your financial future.
You’re Planning For a Divorce – Now What?
The divorce process can be anxiety-inducing and leave you with many questions, such as:
- What happens to your retirement funds in divorce?
- Will my 401k face tax consequences as a result?
- Will my spouse be able to withdraw from my account?
- What happens to the money I worked hard to earn for my retirement?
Asking questions like these are important for your financial future and can help you get started in protecting your hard-earned assets and the retirement funds. However, it can be difficult to know where to start in planning for your divorce.
Not only does divorce leave you with a lot of questions, but it also has many consequences for your retirement accounts. These consequences can be even worse if you try to plan on your own instead of consulting a divorce lawyer.
For example, if you and your spouse do not have an agreement about what will happen to your retirement accounts during the course of your divorce, you will not be able to protect them from being divided. You may assume that they are safe because Arizona is a community property state, but unfortunately, this is not the case.
The Arizona divorce system does follow community property laws. Because of these laws, you will have to split up your retirement accounts during the course of a divorce. The key is making sure that they are put into the correct accounts in order to protect them from being taxed.
Is Retirement Money Protected From Divorce?
Arizona is a community property state, which means that the assets and debts of a married couple are considered to be their community property. This means that they will have equal ownership, regardless of who earned the money or paid the credit card, for all assets that were acquired during the length of the marriage.
However, it is not uncommon for one party of the divorce to make more money, meaning that they may have more assets than their spouse. This is why it can be very important to understand the different ways that retirement accounts are divided in a divorce.
It is important to take proper inventory of your assets and debts before filing for divorce. This can help you to know what assets and liabilities that you will be responsible for after the process is complete. If you had a retirement account prior to your marriage, this is considered as separate property and will not be divided in the divorce. However, if you opened a new retirement account during your marriage, it may be considered as community property and will have to be divided in the divorce.
If you plan to liquidate your retirement before you reach a qualifying age, it is important to know that you can face up to a 10% early withdrawal fee. In addition, the money that you take out of your retirement account will be subject to federal income tax. These can add up to significant losses to your plan. That’s why it is best to prevent these substantial fees that will affect your retirement savings by consulting with a divorce lawyer.
How Are Retirement Funds Split in a Divorce?
Since Arizona is a community property state, the retirement funds that are acquired during the marriage may have to be divided in a divorce. While the state does have this community property law in place in order to protect from unfairness, it does not always guarantee that the retirement accounts will be divided equally.
There are ways to protect your retirement funds and to ensure that they will be kept as separate property. The first and most obvious way is by not opening a retirement account during the marriage; this will make it clear that you intend to protect the retirement funds from being divided in a divorce.
Another way is by signing a prenuptial agreement before the marriage. This will protect your retirement funds from being divided in a divorce, as long as you remain married to that spouse and do not open a retirement account with someone else.
However, it is possible that if you didn’t sign a prenuptial agreement or you opened an account during your marriage, it may have to be considered as community property. If you are currently in the process of a divorce, it is important that you begin to understand how your retirement funds will be divided. You need to make sure that you protect your assets and know how much will be available for your future.
Is My Spouse Entitled to My Retirement After Divorce?
If your spouse is named on any of your accounts, they are entitled to a portion of the assets. Even if they are not, and these funds were accumulated throughout the duration of your marriage, your spouse does not have to be named on your account for them to claim a portion of it. This is true even if your spouse did not contribute any of the money to your account.
This also includes retirement plans and assets, even a pension. Your spouse is entitled to a portion of your retirement accounts, even if they did not contribute any money or benefits from the plan. In Arizona, this would fall under this “community property state” – meaning these are also equally split.
However, the retirement funds and assets you had previously acquired before the marriage are considered separate property and are not part of the divorce. These funds were acquired before you made your marriage vows, meaning they will be kept by whoever owns them. It’s important to note that there are no tax consequences you will face as a result of splitting your retirement account with your ex-spouse.
Do I Get Half of My Spouse’s 401k in a Divorce?
In a divorce, an ex-spouse is entitled to half of the 401k and other retirement accounts that were acquired during your marriage. This includes any employer-matched retirement plans. This means that the funds your spouse has acquired since your marriage are considered community property and will be divided between you both.
First, the value of both you and your spouse’s 401k is taken into consideration. This includes any company matching that they have acquired since the marriage began. It’s highly recommended that a professional retirement expert is consulted to help with the division of funds and assets, to both ensure that they are accurate, starting at the time of your marriage, and that the funds being accounted for are truthful. Never lie about the value of your retirement plans as the negative consequences may be greater than the assumed positives.
Once the value of the 401k is determined, a professional retirement account specialist will determine the percentage of your spouse’s 401k that you are entitled to in a divorce. This is based on the amount of time you have been married and how much each person has contributed to their retirement accounts.
The funds are then allocated appropriately. If your spouse is insisting on having the cash immediately, then an experienced divorce attorney will ensure the taxes are coming from their funds, and not yours.
What Happens If a Part of Your 401k Goes to Your Spouse?
If a portion of your 401k goes to your spouse in the divorce, be sure you are aware of all tax responsibilities. Often, you will need a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that requires the 401k to be split in accordance with your divorce agreement and allows the funds to be moved from the two accounts. If you do not have a QDRO, this could lead to major tax consequences and if your ex-spouse is rolling over the funds into their own 401k, you could also be subject to income tax on the funds. That is why a QDRO is highly recommended for your benefit.
A QDRO will also ensure that all taxes are handled appropriately and that you will not lose an uneven portion of your 401k. If you are worried about taxes, it’s best to consult with a professional retirement account specialist or divorce attorney that can help.
Protect the Money You Earned
Even though you may have worked hard to earn your money, it is important that during a divorce, you protect the funds. This means having an experienced divorce attorney and a professional retirement account specialist. These experts will help ensure you understand the laws and your rights as it pertains to retirement accounts during divorce and will ensure your retirement funds are protected.
Protecting the funds you earned during your marriage is important. If you feel like dividing retirement accounts in divorce seems unfair, there are many other factors to consider that will depend on the specifics of your situation.
Each divorce is unique and therefore, no two cases will be the same. The only way to ensure you are receiving a fair and equitable settlement is by hiring an experienced divorce attorney who will evaluate your and your spouses’ situation and provide you with the best possible outcome.
You Deserve Peace of Mind Regarding What Happens to Retirement Funds in Divorce
You have worked hard for your retirement, and through the process of your divorce, you deserve to have trust and confidence that your retirement funds will be appropriately dealt with. Divorce is tough enough without this additional concern. No matter where you are in the process, it is important to consult with an attorney who understands the Arizona retirement system and can help you protect your assets.
Skilled AZ Divorce Attorneys, The Valley Law Group
Our team of professionals will help you protect your assets and put a plan in place so that you’ll have peace of mind regarding your assets. We’re ready to discuss your needs and instruct you on how to move forward.
Contact our Arizona legal services team to begin the process of putting your assets in order.
Jonathan Roeder, Founder/Director of Marketing of The Valley Law Group, is an Arizona native who has dedicated his life and career to the service of others. After graduating salutatorian of his high school class, Jonathan attended beautiful and prestigious Pepperdine University, where he majored in Political Science. During his tenure at Pepperdine University, his passion for helping others grew after securing a clinical position with a residential treatment center for juveniles with substance addictions. Post-graduation, Jonathan returned to Arizona and served as a residential manager for mentally and physically disabled homes.