How are retirement benefits split in a divorce?

In Wisconsin, there is a legal presumption that all marital property should be divided equally between the parties. In the separation of assets , retirement account assets can be awarded as a fixed sum or the percentage of an account.

How do I protect my retirement in a divorce?

Because assets are split equally in Wisconsin, you will want an attorney to advise you on how best to protect your retirement in a divorce. Legal counsel can advise you on whether any part of your retirement can be excluded from the marital estate based on Wisconsin statutes and case law.

How much of my retirement is my ex entitled to?

In Wisconsin, there is a presumption that all marital property be divided equally between the parties. Property division relates to all marital property subject to the divorce or legal separation. However, things don’t have to be split down the middle, instead, parties can come to an agreement. For example, one person could decide they want to keep all the retirement accounts in exchange for letting the other party keep the marital home .

Who pays taxes on a 401K divorce settlement?

When a 401k account is divided in a divorce through a QDRO, neither party pays income taxes at the time of division. Instead, both parties may be subject to tax implications and early withdrawal penalties at the time the account is liquidated.

Dividing Retirement Accounts and 401ks in Wisconsin Divorces

Under Wisconsin law, any retirement accounts created or added to during the marriage are marital assets and will be split equally. To protect your 401(k), IRA, pension, or any other retirement account, avoid cashing it out by negotiating with the other party.

Retirement Accounts as Marital Property

In Wisconsin, retirement accounts held by either party at the time of divorce are considered marital property and are subject to division between the parties. The specific handling of these accounts depends on various factors, including the type of retirement account, the contributions made by each party, and the length of the parties’ marriage.

Property Division in Wisconsin

Under Wisconsin statute §767.61, all property acquired by either party before or during the marriage, other than property acquired through gift or inheritance, is subject to property division in a divorce or legal separation.

The court presumes that the marital property shall be equally divided but can deviate from the equal division based a variety of factors. Some of those factors include the length of the marriage, the property brought into the marriage by each party, and whether one of the parties has substantial assets not subject to division by the court.

Common Types of Retirement Accounts

The most common types of retirement accounts held by parties to a divorce action are:

Qualified Retirement Plans - 401k plans, 403b plans, and other employer-sponsored retirement accounts
Individual Retirement Accounts (IRAs) - traditional and Roth IRAs
Pension Plans - defined benefit plans where the employee receives a specified monthly benefit upon retirement

An attorney who specializes in family law will be comfortable advising you on the best course of action for any retirement account. If you have questions specific to your case, call Divergent Family Law.

Valuation of Retirement Accounts

Retirement accounts are valued as of the date of the final divorce. Throughout divorce proceedings, parties will be required to update the value of their retirement accounts, based on their monthly, quarterly, or annual statements.

The account is divided based on the value of the account on the date of the final hearing. Courts can divide accounts by either awarding a percentage of the account to each respective party or by awarding a fixed sum. It is more common for courts to award percentages of retirement accounts to avoid circumstances where the value of the account is less than the sum awarded to one party.

Most pension accounts need to be valued by a third-party evaluator to be used at the time of a final hearing. Often, the annual pension statements provided to pension holders do not contain present day valuations.

Computer and calculator calculating retirement account values during a divorce

Division Process for Retirement Accounts

Most retirement accounts must be divided by a separate court order called a Qualified Domestic Relations Order (QDRO). The use of a QDRO is necessary to divide qualified retirement plans without incurring early withdrawal penalties or taxes.

The division of a retirement account by QDRO allows both parties to continue to hold retirement account assets in a retirement vehicle. They can then be invested in accordance with each party’s wishes. The QDRO is a legal order, filed with and executed by the court, instructing the plan administrator on how to divide the account. All QDROs are preapproved by the plan administrator before the proposed order is filed with the court.

IRAs typically do not require a QDRO for the account to be divided in a divorce. Instead, a transfer incident due to divorce can be performed. This is where a portion of the IRA is transferred to a new IRA in the other spouse’s name without tax penalties.

Comparing Retirement Accounts to Other Assets

When negotiating the division of retirement accounts, lawyers often negotiate tax discounts to be assessed against non-roth retirement accounts. This allows parties to compare apples to apples when assessing the division of retirement accounts in conjunction with real estate and other assets. The specific tax discount to be provided to non-roth retirement accounts takes into consideration the amount of retirement assets and both parties’ annual earnings.

Cashing Out a Retirement Account

Generally, cashing out a retirement account is not advised. Retirement accounts surrendered or cashed out prior to a divorce action being started or finalized are subject to income taxes and early withdrawal penalties.

Also, people getting divorced are legally prohibited from liquidating or otherwise disposing of retirement account assets during or leading up to a divorce action. You should consult an attorney if you wish to withdraw funds from your retirement account.

If either party intends to liquidate their retirement account, they should consider the earnings of each party and their relative tax bracket. These things are important to consider anytime you think about cashing out a retirement account.

Making Decisions in Property Division

Most attorneys will advise clients to consider the historical and projected future performance of retirement accounts when deciding which accounts each party wishes to keep after the separation. The ability to keep or be awarded a diverse portfolio of assets is often the preferred option and the recommended option.

As always, it is best to consult an attorney if you are in the process of a divorce or legal separation. An experienced family law attorney will help you strategize exactly how to approach your separation based on the specifics of your case.