Money is often the biggest issue in an Arizona divorce. While many financial issues during and after a divorce are temporary, you might worry about how a divorce will impact your retirement.
Specifically, will you need to share half of your retirement with your ex-spouse? Or even worse, will you lose your retirement altogether?
The answer to these questions depends on your situation. However, most divorces do not involve a spouse losing everything in their retirement accounts.
Community and separate property
Arizona is a community property state when it comes to divorce. This means that property acquired by you and your spouse during marriage is considered jointly owned or “community” property.
The law requires community property to be divided equitably, or fairly, in a divorce. Although this does not necessarily mean equally, an equal split is often assumed to be fair.
Separate property generally does not need to be divided with your spouse. Separate property is property acquired before marriage, gifts or inheritances that did not mix with community property.
For most divorcing couples, retirement accounts are going to be community property. Even if you held your retirement account prior to getting married, any increase in the value of the account during your marriage is community property.
Additionally, if you withdrew any funds from a separate retirement account to pay for something marital, such as a down payment on a house or a vacation with your spouse, your retirement account could now be considered community property.
Options for splitting retirement accounts
You do not always need to part with your retirement account because you are getting divorced. Remember that the goal is a fair split. This can be accomplished in various ways.
If you and your spouse both hold retirement accounts of relatively equal value, you can agree that each of you keep your own account.
The situation becomes more complicated if you have a retirement account but your spouse does not or has one with little value. You might need to give your spouse a portion of your account to achieve a fair split.
An equitable split does mean each particular asset must be equally divided. It is an overall equitable split. If you cannot bear the thought of parting with any of your hard-earned retirement savings, consider giving up another asset, such as a home, in exchange for keeping your retirement account.
When your equitable division involves splitting retirement accounts, pay extremely careful attention to the rules of your retirement plan. Each plan has different rules and regulations that are specific to that plan.
Qualified domestic relations orders
Retirement accounts are typically divided by a qualified domestic relations order (“QDRO”). This is a special document used specifically for dividing retirement accounts.
QDRO’s must be carefully drafted to ensure all rules and requirements are met. The purpose of a QDRO is to allow funds to be transferred out of a retirement account and avoid the usual tax penalties associated with a withdrawal.
This means a mistake in QDRO drafting could cost you. If your property division settlement or order requires you to divide your retirement account with your spouse, contact your plan’s administrator as soon as you can and obtain a copy of the QDRO requirements.
QDRO’s are typically drafted by a professional. They are not usually filed with the court.
Divorce is likely to negatively affect your finances, at least temporarily. But you should not walk away financially devasted. You deserve a fair outcome as the law allows, which includes being able to continue planning for your retirement.