Retirement plan contributions made during a marriage divide in half under California’s community property laws. The IRS website notes that an ex-spouse may receive part of the current balance in a retirement plan.
A soon-to-be ex-spouse, however, may not have a right to cash out of a retirement account after finalizing a divorce. He or she may need to wait until the plan’s participant dies or retires.
Plans requiring a qualified domestic relations order
The type of plan determines if a spouse can receive some of its proceeds after settling a divorce. As noted by Kiplinger’s Personal Finance, some retirement plans, such as a 401(k), require a qualified domestic relations order.
By submitting a QDRO, for example, a judge may order that some of the proceeds make up part of a divorce decree. If awarded, a portion of a 401(k)’s account balance may transfer to an ex-spouse’s account or IRA.
QDROs, community property and debts
Couples with valuable assets may wish to use a retirement plan’s balance to help divide their shared property. Instead of receiving payments in the future, for example, a spouse may instead take another marital asset. They may include the proceeds from a QDRO.
As explained on the Judicial Council of California’s website, if spouses accumulated debt, the Golden State’s laws also require dividing the balances in half. Each spouse’s share of assets may go toward paying off community debts.
When combining assets and subtracting debts, a couple can calculate their community property’s total value. Based on each individual having a right to half, spouses may still negotiate their divorce settlement. If they cannot reach an agreement, however, a judge may divide their assets and debts for them.