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How divorce can affect your investment and retirement accounts

On Behalf of | Jul 10, 2023 | Asset Division

Investment and retirement accounts are significant assets, providing individuals and families with greater financial security and stability for the future. As a result, it’s essential to understand how these accounts may be affected when someone who possesses such assets goes through a divorce.

California is a community property state, meaning any assets acquired during the marriage are generally subject to division upon divorce. Marital property refers to assets acquired during the marriage, while separate property includes assets obtained before the marriage or through inheritance or gift to one spouse during the marriage.

In the event of a contentious divorce, the court will examine whether investment accounts, such as stocks, bonds, mutual funds and brokerage accounts are marital or separate property. The courts follow the principle of equitable division, aiming to distribute community property fairly between spouses. Equitable division does not necessarily mean an equal 50/50 split. Instead, the court will consider various factors, such as the length of the marriage, each spouse’s financial situation and the contributions made by each party to the marriage and the assets in question when seeking to resolve a dispute.

When dividing investment accounts, the court may order one spouse to retain specific accounts while compensating the other spouse with assets of comparable value. Alternatively, the court might order the sale of investments and divide the proceeds between the parties. Of course, if spouses and their attorneys can negotiate a mutually-agreeable solution without judicial intervention, assets can be divided in whatever way both parties approve of.

How divorce can impact retirement accounts

Retirement accounts such as 401(k)s, IRAs and pensions are also subject to division during divorce. Like other assets, the portion of these accounts acquired during the marriage is generally considered community property. It’s important to note that retirement savings accumulated before the marriage may still be subject to division if commingled with community funds.

A court typically issues a Qualified Domestic Relations Order (QDRO) to divide retirement accounts. A QDRO is a legal document that outlines how retirement benefits should be divided between divorcing spouses. It helps to ensure that the division scheme complies with retirement account rules and regulations. A QDRO allows for direct transferring or allocation of a portion of one spouse’s retirement account to another without incurring early withdrawal penalties or tax consequences.

A divorce can have a significant impact on investment and retirement accounts. Understanding community property laws, evaluating marital and separate property and considering the equitable division of assets are crucial aspects of this process.