Financial security in retirement takes years of planning and saving. Married couples may do this retirement planning together. Perhaps each spouse has their own retirement account or pension. Or maybe one spouse is a stay-at-home parent or cannot work. So, the couple plans to live off of one spouse’s retirement assets when that time comes. But what happens to those retirement funds in a divorce? Can a party just keep all the money they personally have been investing and saving for retirement? Maybe not—at least not all of it.

Whether it be an IRA or 401K, or another type of retirement plan, a judge may order a spouse to transfer part of their retirement to the other spouse in a divorce. This is due to the equitable distribution approach Massachusetts judges take when making decisions about the division of assets and liabilities between the parties in a divorce.


Equitable Distribution of Retirement Accounts

In Massachusetts, we follow the “equitable distribution” approach to property and debt division in divorce. When dividing the marital estate in a divorce, a Massachusetts probate and family court judge will determine what is most fair given the parties’ circumstances. Fair does not necessarily mean equal, however. In fact, Massachusetts judges have broad discretion when equitably dividing the marital estate. A retirement account—or at least the portion accrued during the marriage—is a marital asset subject to equitable division in a divorce. This is true whether the retirement asset is a pension, 401(k), IRA, or other retirement planning investment.


Example of an Equitable Distribution of Retirement Accounts

Jessie and Sammie marry at age 25. Neither had any retirement accounts at the time. After 20 years of marriage, the parties decide to divorce. At the time of the divorce proceedings, Jessie has a 401(k) valued at $300,000. Meanwhile, Sammie has a 401(k) valued at $500,000. So, at the time of the divorce, there is a $200,000 difference between their retirement accounts.

What will happen to these accounts under equitable distribution? Generally speaking, Jessie and Sammie should expect that a judge will equalize whatever value has accrued in retirement assets over the course of the marriage. The judge will likely order Sammie to transfer $100,000 of their retirement funds to Jessie. Why? Because $100,000 is half of the $200,000 difference between Jessie’s and Sammie’s retirement accounts. That would leave both Jessie and Sammie with $300,000 in their retirement accounts upon divorce.

Note that this is a simplified example. It does not include mention of any potential tax implications, the economic and non-economic contributions of the parties during the marriage, or other factors a judge may consider when making equitable distribution determinations.


Ways to Protect Retirement Accounts in a Divorce


Prenuptial and Postnuptial Agreements

One way to protect retirement accounts from going to the other spouse in a divorce is through a prenuptial or postnuptial agreement. A prenuptial agreement is an agreement that spouses-to-be enter into prior to marriage. In this agreement, the parties dictate what will happen to their assets should they divorce. A postnuptial agreement does the exact same thing, except it is executed after marriage.

Both prenuptial and postnuptial agreements can include provisions stating that the retirement account funds each spouse accumulates during the marriage will be treated as separate property in a divorce. So, through the prenuptial or postnuptial agreement, the spouses-to-be can pre-determine what will happen with retirement assets—especially those accumulated during the marriage—if they divorce.

In order for the prenuptial or postnuptial agreement to be enforceable in a divorce, the judge must determine that it was “fair and reasonable” both at the time that it was entered into and at the time of divorce. Notably, a judge will very likely not enforce a prenuptial or postnuptial agreement that will leave a divorcing spouse with little or no assets upon divorce. Accordingly, spouses-to-be must work to ensure that any provisions regarding the division of property at the time of divorce do not heavily favor one spouse over the other.


Establish Comparable Assets to Protect Retirement Accounts in a Divorce

A second way spouses can work preemptively to protect their respective retirement accounts in a divorce is by establishing comparable retirement assets during the marriage. Again, a judge’s goal in a divorce is, in part, to divide the marital estate equitably between the parties. The equitable division of retirement accounts may be clearer-cut if the spouses have comparable retirement assets. Let’s consider an example.

Jessie and Sammie married right after college. Around the same time, they began their respective careers. Wanting to take advantage of employer matches, Jessie and Sammie each enrolled in their company 401(k) plans at the start of their employment. After years of marriage, Jessie and Sammie file for divorce. At the time, each of their respective 401(k) accounts had a value of approximately $100,000.

In this example, both spouses are enrolled in a 401(k) plan. They also have about the same amount in retirement funds at the time of divorce. Accordingly, a judge may order that each keep the funds in their respective account upon divorce.

Again, we must point out that this is a simplified example. Here we do not consider different types of retirement plans, any potential tax implications, the contributions of the parties during the marriage (economic and non-economic), or other factors a judge may consider in equitably dividing a marital estate.


Protect Retirement Accounts by Giving Up Another Asset

Lastly, there’s another option for cases in which it’d be likely that a judge would order one spouse to transfer retirement funds to the other in a divorce. To protect retirement assets from equitable distribution in this scenario, the spouse that’d likely have to transfer retirement funds could give up other present assets. Such assets could include things like other investments, cash, or home equity. Essentially, this would constitute an exchange of one asset (i.e. retirement funds) for another (ex. valuable artwork).

To offset the retirement funds with another asset, however, one must consider the value of the assets. More specifically, the assets in this “trade,” which include the retirement funds, should be comparable in value. The parties should consult with experts to determine the value of the assets in question. And such a determination may consider if/how the asset will be taxed, appreciation and depreciation, etcetera.


Consulting with Experts

The goal in a divorce case is, in part, to equitably distribute marital assets. To do so, the parties and court must first know the value of those assets. This is where experts sometimes have a role to play. Certain experts—like business valuation experts, forensic accountants, and real estate appraisers—can help determine the present-day value of different types of assets. Examples of such assets include, but are not limited to, businesses, real estate, atypical assets like intellectual property, and, yes, retirement accounts and pensions.

When a party wants to give up another asset in order to keep all of their retirement, an expert may be particularly helpful. Here, the expert could ensure that the retirement funds that the court would otherwise award to the other party are offset against another asset of comparable value. For example, if the court would likely order Jessie to transfer $100,000 of their retirement to Sammie, Jessie may propose that Sammie instead keep valuable artwork that the parties own. In this example, the expert(s) would value the artwork and retirement assets to help the parties and court ensure that this is a fair trade. Experts can also identify any tax implications related to the assets, the potential for appreciation and depreciation, etcetera.

The parties may also hire an expert to prepare a Qualified Domestic Relations Order (“QDRO”) in the divorce. A QDRO is a legal document that tells the retirement plan administrator how to divide the retirement funds after divorce. The need for a QDRO depends on the type of retirement asset in question; some retirement plans do not require a QDRO.


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