Marital assets are divided “equitably” during a divorce under Alabama law. Those assets include retirement plans owned by either spouse, and the process can be highly complex for high net worth spouses.
Alabama once protected retirement benefits unless a divorcing couple was married for at least 10 years. However, a 2017 law changed that, allowing for a judge’s discretion dividing all retirement funds, regardless of the marriage’s length.
Retirement assets subject to division
You worked hard to build your wealth and plan for retirement. If your marriage is over, the nest egg you worked so hard for can be significantly reduced. These assets include:
- Roth IRA
- Private pensions
- State pensions
- Military pensions
Qualified retirement plans – including pensions and 401(k)s – are typically split under a qualified domestic relations order (QDRO), while IRAs fall under a “transfer incident to divorce” process.
Considerations for dividing retirement plans
Given the complicated nature of these assets, here are a few general things to keep in mind during the divorce process:
- Separate vs. marital assets: In most cases, ex-spouses only share the amount earned during the marriage. Funds accumulated before marriage typically aren’t eligible.
- Paying an ex-spouse: Even when dividing retirement plans, you don’t necessarily have to withdraw funds now or designate a portion after you retire for your ex-spouse. You can also substitute other assets equal to their share of the settlement.
- Tax liabilities: Dividing a 401(k) vs. a Roth IRA has different tax consequences which both parties must consider before reaching any agreement.
Even small mistakes can bring enormous consequences. That’s why it’s advisable to seek knowledgeable legal and financial guidance early on in the process.
Minimizing disputes and future errors
Working with an expert can help avoid lengthy battles over dividing retirement distributions. Divorcing couples often find a reasonable solution by substituting assets to keep these accounts from being reduced, affecting the future rate of return.
Also, plan owners often err by forgetting to update their beneficiaries after a divorce. If you die and your former spouse is still the primary or co-beneficiary, they are entitled to receive the entire amount or whatever percentage you’ve selected.