Retirement Accounts in Divorce: Asset or Income?

For many Minnesota couples, retirement accounts such as pensions and 401(k)s figure prominently in the divorce settlement. To the extent that money in these accounts accumulated during the marriage, it is marital property subject to division in divorce. Even if only one spouse is working and has a retirement account, if funds in the account were earned during the marriage, both spouses have a right to and equitable division.

The division of employer-provided retirement accounts can be complicated, requiring a Qualified Domestic Relations Order (QDRO). (Accounts that are not employer-provided, like Individual Retirement Accounts (IRAs) do not need to be divided by QDRO.)

In addition, retirement accounts are an unusual type of asset. Unlike a car or a piece of furniture, or even the marital home, a retirement account is an asset that provides income to the recipient after they retire. What does that mean when determining whether a spouse is entitled to spousal maintenance (alimony) in the divorce?

Minnesota Statutes Regarding Property and Maintenance

Minnesota Statute 518.552(1)(a) states that maintenance may be awarded to a party who “lacks sufficient property, including marital property apportioned to the spouse, to provide for reasonable needs of the spouse considering the standard of living established during the marriage, especially, but not limited to, a period of training or education…”

In other words, whether a spouse is eligible for spousal maintenance after separation or divorce depends in part upon how much property they have available that can be used to provide for their reasonable needs. This includes property received in a settlement, such as retirement accounts.

If you are awarded a portion of your spouse’s retirement account, the court may consider that property that can be used to provide for your reasonable needs. Unfortunately, depending on your age and the type of retirement account, the funds may not be immediately available for your use. It is likely that whatever the original type of retirement account divided, your share will need to be rolled over into an IRA. IRAs have specific rules about how and when distributions must be made.

If you are 59 ½ or older, you may take distributions from your IRA without penalty (though you will still have to pay income tax on distributions). If you are younger than that, and need the money in your IRA to meet your expenses, you will pay a hefty penalty for early withdrawals.

It is possible that a court could award you a “just and equitable” portion of your spouse’s retirement account in your divorce (probably about 50%). The court could then reason that, because you had that asset technically available to pay for your reasonable needs, you would not need spousal maintenance—or would not need as much as you otherwise might. That could leave you in a situation in which you were forced to withdraw from your retirement assets early in order to survive, and in which you were forced to burn some of those assets in the form of penalties for early withdrawal.

Fair Treatment of Retirement Assets in Divorce

In order to make sure you can provide for your needs, and that you don’t have to consume assets intended for retirement to do so, you need to work with an experienced Minnesota divorce attorney. An experienced attorney who practices primarily in the areas of family law and divorce understands that all assets are not created equal.

Your attorney must be able to address the potential pitfalls of dividing retirement accounts in divorce. She should ensure that the assets themselves are properly valued so that you receive the amount you are entitled to in the divorce. Assets like pensions which involve a future stream of income cannot simply be divided based on the current value of assets in the account. You may need the assistance of a financial professional to determine the correct value of the asset.

Your attorney should also make sure that in taking your property settlement into account when considering spousal maintenance, the court does not unfairly penalize you. While the court is allowed to take the value of property you received in the divorce into account when making spousal maintenance awards, your attorney should make it clear that you may not be able to liquidate retirement assets without taking a financial hit. The numbers on the page do not tell the whole story, and your attorney may need to point that out to the court.

If you have questions about spousal maintenance in Minnesota, dividing retirement accounts in divorce, or other family law questions, we invite you to contact Mundahl Law to schedule a consultation.