Four Strategies When Dividing Retirement Assets In A Divorce
Divorces mark the end of a marriage, but settling a divorce—especially when it comes to financial assets—is all about looking to the future. Separating spouses must find a way to divide their assets that supports their respective lifestyles and long-term plans. This is particularly true when it comes to retirement assets. Decisions about dividing accounts like 401(k)s and pensions can have lasting consequences, shaping financial stability for years—if not decades.
Dividing retirement assets during a divorce can be complex. Unlike tangible assets like real estate or cash savings, retirement accounts require extra nuance. And while no two divorce cases are exactly the same, there are several key strategies and tactics that financial advisors and legal professionals can leverage to guide their clients effectively through the process.
Consider the context. While maximizing a client’s share of retirement assets is an essential goal, it must be balanced against the broader context of the divorce. Each client’s priorities and circumstances are unique. For example, a specific arrangement may be a top priority for the client if they have young children—perhaps they need cash now, rather than waiting until retirement age—or, perhaps retaining the marital residence is a key concern. Presenting too aggressive a posture on retirement assets may push the competing spouse away from the bargaining table when it comes time to talk about these key considerations. Keeping the "big picture" in mind ensures that short-term financial gains don’t come at the expense of long-term objectives.
Not all assets are of equal complexity. There can be a wide range of retirement assets to divide in a divorce, from 401(k)s and pensions to various IRAs, deferred compensation and beyond. Each of these assets has varying degrees of complexity. Pensions are particularly complicated as they involve future benefits rather than immediate cash value. Valuing and dividing a pension often requires input from a pension actuary. Other types of accounts, like Roth IRAs, are more straightforward to divide. These assets are often “equalized,” or split down the middle: $500,000 to one spouse, $500,000 to the other.
In many cases, taxes and state laws can also influence the calculus. Financial advisors should be aware of all the moving parts before entering into talks with the opposing side. Knowing these variables in advance can make negotiations more efficient and equitable.
‘Fair’ isn’t always the operative word. Divorce settlements are often determined based on what’s “equitable.” That can look and feel a lot different than what is “fair” in the eyes of one party. Equity considers the financial realities and contributions of both spouses. For instance, even if one spouse earns substantially more, they may still be entitled to a share of the other’s retirement funds, including pensions. Whether they choose to pursue that entitlement is another matter—once again, context is key.
Disclose, disclose, disclose. Retirement accounts are typically held in just one spouse’s name, meaning their partner may have limited knowledge—or no knowledge at all—of its existence. Financial advisors should not see this as a license to conceal or obfuscate assets, however. Full transparency is not only ethically sound but also legally necessary. Be up front about any and all retirement assets. They will come to light during discovery one way or another—and if a judge suspects an individual was being untrustworthy, it can jeopardize a positive outcome.
Divorces are rarely simple, and the division of retirement assets is often a complicating factor. With a thoughtful approach and a clear understanding of the complexities involved, however, financial advisors can help their clients achieve outcomes that set them up for financial stability and peace of mind.
Gus Dimopoulos, Esq., is managing partner of Dimopoulos Law Firm P.C., a matrimonial and family law firm based in New York City and Westchester County, N.Y., that specializes in high-net-worth divorces.