In Minnesota, marital property is subject to an equitable division between the parties. Marital property is everything that was accumulated during the marriage regardless of who paid for the item or which spouse is the owner. Retirement assets (e.g., pension, 401(k)s, 403(b)s, and IRAs) that were earned during your marriage are considered marital property and will also be equitably divided in a divorce.

There are many types of retirement assets. This article focuses on 401(k)s, 403(b)s and IRAs, which are considered “defined contribution plans”. These assets contain funds that have been contributed to an account by the employee and possibly the employer. Unlike a pension, which is a right to an estimated payment amount sometime in the future, defined contribution plans are set accounts with known balances. It makes defined contribution plans easier to evaluate and divide, if necessary.

There are several things to keep in mind when you are considering how you should divide your defined contribution retirement assets.

  1. Tax Implications – You should talk to a financial advisor or accountant about the potential tax implications of the retirement assets. Some retirement assets, like a Roth IRA, are funded with “post-tax” dollars, meaning you have already paid taxes on the money before the funds are contributed to the account. Other retirement accounts, like many 401(k)s, are funded with “pre-tax” dollars, meaning your contribution was made with income before any taxes were paid. “Pre-tax” retirement assets typically have higher tax consequences later on when the funds are withdrawn from the account. Practically speaking, that means a “post-tax” retirement account with the same balance as a “pre-tax” retirement account may actually be worth more because of the future tax liability. When considering what an equitable division would be, you should make sure you are comparing similar assets (i.e., pre-tax assets with other pre-tax assets and post-tax assets with other post-tax assets).
  2. Accessibility – You also need to consider how accessible the retirement assets are and what your needs will be moving forward after the divorce is completed. Many retirement assets have restrictions on when the funds can be withdrawn, and if they are withdrawn early there may be additional taxes or penalties. In some cases, if you are awarded a share of your spouses retirement account because of a divorce, then you may have the ability to withdraw the funds right away without an early withdrawal penalty. This is not the case with all types of retirement accounts and it is typically only allowed on the initial transfer into your name, so you should make sure you know what your financial needs will be following the divorce. Creating a sound budget and speaking with a financial advisor are great options to make sure your needs are met.
  3. Long Term Benefits – You should think about the long term impact of the assets that you are receiving in a divorce. If people are many years, or decades, away from retiring, other assets may seem more appealing in the moment (e.g., cash, vehicle, or the home). A very common thing for people to ask is if they can give up their interest in their spouses retirement assets in order to make it easier to keep the home. Legally, that could be an option. But financially, that may not be what is best for you in the long run. Again, a financial advisor is a great resource to discuss long term benefits of retirement assets and find out what might be best for your specific situation.

Retirement assets accumulated during the marriage are considered marital assets and would be subject to an equitable division between spouses in the event of a divorce. If your divorce involves retirement assets, you should speak to an experienced family law attorney. Contact Rochford Langins Jarstad LLC today to schedule a consultation.