Divorce? Protect YOUR Assets
No one wants to bring this up, but half of today's American marriages will wind up in divorce court. Even if you're part of that more-stable "older generation," you may find yourself facing this possibility (and you know if you do).
After the eventual realization that a divorce is on the horizon, one of the first moves to make - other than assuring that ties with children and other family members remain strong - is to assure that assets are divided fairly between you and your soon-to-be ex.
Naturally, be of the biggest parts of the asset-division process will be to decide which spouse is entitled to what portion of your combined retirement money. But first, take a look at some of the major financial issues at the heart of a divorce.
What's at Stake
In most states, assets subject to legal division include almost everything you and your spouse have accumulated from the day you were married - homes, furniture, investments, stock options, life insurance, anticipated tax refunds, retirement plan savings, and other employee benefits. If you live in one of nine "community property" states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) most assets are automatically divided equally. Other states' courts will make this division by weighing such factors as length of the marriage, each spouse's earning capacity, and individual contributions to building household assets. Normally exempted from division are individual inheritances, property owned before marriage, and gifts to an individual spouse.
Trying to hide assets from a spouse and the courts can backfire. For example, neglecting to mention your retirement plan assets to the court could trigger an "omitted-asset" label on the money if discovered later on, and action could be taken to redivide all of your property.
Think Now About Retirement
If you or your spouse contribute to a 401(k) plan, be aware that the division of these assets can be more complicated. Money that accumulates in a 401(k) or pension plan while you're married is legally divisible in a divorce, regardless of whether or not you live in a community-property state. (Depending on your state, this amount is normally anything accumulated from the date of the marriage to the date of separation or divorce.)
To obtain a share of your spouse's 401(k) assets in a divorce, you must submit a qualified domestic relations order (QDRO) to your spouse's benefit plan before distributions are made, which prevents your spouse from making withdrawals. Even if both of you agree on the division, without a QDRO any distributions become fully taxable. Income taxes and a 10% penalty due on withdrawals before age 59 1/2 may apply. A divorce-related distribution made under a QDRO isn't assessed the 10% penalty, though income taxes are due. If you and your spouse decide to keep your individual 401(k) assets to yourselves, put that agreement in writing to prevent the courts from considering the money divisible.
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