Retirement Funds and Divorce: What Happens to Your 401(k), IRA, or Pension?

When couples are considering divorce, concern often centers first on the house, vehicles, savings, and other assets that they use every day. Fewer people think about retirement accounts, even though these can represent a substantial portion of a couple's wealth. Put simply, divorce can affect the retirement savings that you have spent years building. Here is what to know, from the team at the Law Offices Of Cara L. Santosuosso, LLC, your trusted collaborative divorce lawyers in Cleveland.

Division of Retirement Accounts in Ohio

Ohio is an “equitable division” state. This means that assets and retirement funds accumulated during a marriage are considered marital property and are subject to a fair division based on individual circumstances, which is typically not an automatic 50/50 split.

Factors that impact equitable distribution of assets can include:

• Length of the marriage
• Assets and liabilities of each spouse
• Which spouse has custody of any children 
• Liquidity of the property and the tax consequences of the division
• Retirement benefits of each spouse
• Earning capacity, income and other economic circumstances of each spouse
• Contributions (including non-monetary) of each spouse to the marriage
• Financial misconduct on the part of either spouse
• Any other that factor the court finds relevant

When dividing assets, a key differentiation is made between “marital” and “separate property.” The name that appears on the account–either you or your spouse–is not necessarily what determines whether the asset is marital or separate property. Instead, the terms are defined this way in reference to retirement accounts:

• Marital Property: Contributions, investment growth, and service credits earned during the marriage. Due to the couple being married during the earning window, these assets belong to both spouses.
• Separate Property: Contributions and growth accrued before the marriage or after the legal separation or divorce date. These assets typically remain with the original owner (provided that they are clearly documented).

Potential assets that a couple may hold can be many. In this instance, however, we are speaking specifically about retirement accounts, which may include:

• 401(k)s
• 403(b)s
• Traditional IRAs
• Roth IRAs
• Defined-benefit pensions
• Government retirement plans
• Deferred compensation accounts
• Other employer-sponsored retirement benefits

How much of your retirement assets you retain will depend on all of the above factors. There are also some additional requirements that may come into play.

Qualified Domestic Relations Order and Asset Division

The court-approved Qualified Domestic Relations Order (QDRO) is the mechanism by which assets are actually divided. In Ohio, a QDRO is required to divide private-sector, employer-sponsored retirement plans that are governed by the Employee Retirement Income Security Act (ERISA). These may include 401(k) and 403(b) plans, private-sector defined benefit pensions, and both union and multi-employer pension plans. 

Individual Retirement Accounts (IRAs, Roth IRAs) and both military and federal pensions are not employer-sponsored or ERISA-governed and so do not require a QDRO for division. Instead, an IRA will utilize a "transfer incident to divorce" which legally moves a designated portion of the funds directly between the spouse’s IRAs. In Ohio public pension systems like OPERS, a specialized court order called a Division of Property Order (DOPO) is used to disburse funds, typically once the employee spouse actually retires or starts collecting.

In the event that retirement earnings are awarded to the non-employee spouse, the QDRO document provides instructions for employer plan administrators and requires them to carve out a specific dollar amount or percentage for the awardee.

Inheritance and Divorce In Ohio

Received inheritances are generally separate property and are not generally divided in a divorce, provided that they belong exclusively to one spouse. For an inheritance to remain as separate property, it must:

• Be kept in the receiver’s name only and deposited or stored in an individual account
• Not be used jointly, such as to pay for shared marital expenses or family needs
• Have a clear paper trail (original will, trust, or estate documents)

However, under specific circumstances, an inheritance can lose its separate status and become subject to division as marital property. The criteria that could cause this to happen include:

• Commingling inherited cash with family income in a joint bank account where it was used for daily expenses
• Transmutation, either through using the inherited asset for a down payment on a home or adding a spouse's name to the deed or title
• Appreciation in value, such as if the inheritance grew in value during the marriage and especially if a spouse actively helped maintain or increase that value
• Support considerations, such as spousal or child support, could view an inheritance as a resource even if if remains separate property

Situations and actions will vary and these will ultimately impact how assets–inheritances included–are handled in a divorce. The only way to ensure that an inheritance is not subject to division in divorce proceedings is if you and your spouse have included it in a prenuptial or postnuptial agreement.

Divorce Implications for Beneficiary Designations

In Ohio, a divorce, dissolution, or annulment automatically revokes an ex-spouse as a beneficiary in wills, trusts, statutory power of attorney, and real estate transfer-on-death designations. However, federal law can override state rules, such as in the case of the Employee Retirement Income Security Act (ERISA). Under this provision, employer-sponsored plans like 401(k)s and company pensions strictly follow the named beneficiary on file with the plan administrator, regardless of whether you are still married or have since divorced. So it is vital that you update beneficiaries after divorce to ensure that the desired individuals inherit your assets.

Work With Experienced Divorce Attorneys in Cleveland, Ohio

When a couple is considering or undergoing a divorce, the immediate financial impact to themselves and their children are typically top-of-mind, but future, retirement-related implications may not be. This is just one more reason why it is so important to work with a trusted divorce lawyer who understands your situation and will help you to retain the most financial stability possible. From understanding how divorce and taxes interact to the ramifications of marital and separate property and asset division, there is a lot to know.

The team of collaborative divorce lawyers at the Law Offices Of Cara L. Santosuosso, LLC are here to help. We only want what is best for you and your family and are happy to offer seasoned guidance regarding the financial side effects of divorce, both now and in the future. To learn more about our services and benefit from our expertise, contact us to schedule a consultation.