Maybe a retirement account is where the majority of your net worth lies. Or maybe you just have a big chunk of money in there. Or maybe you want to retire early (good for you)! Whatever the reason is, you probably want to protect your retirement account(s). We totally understand. A prenuptial agreement can have a huge impact on your retirement accounts if you want it to. Keep reading to learn more about the intersection of prenups and retirement accounts.
How does a prenup work?
A prenup is a contract made between spouses before getting married. It usually covers topics such as property division, debt allocation, and alimony (i.e., spousal support). A prenup may also cover the obligations of each spouse during the marriage, such as how to handle joint bank accounts, confidentiality, life insurance, and more. If a couple is to divorce, they can either privately enforce the contract (with the help of their divorce attorneys) or ask the court to enforce the prenup. A prenup generally streamlines the divorce process by cutting down on time spent arguing over issues–because they’ve already been decided in the prenup.
What is considered a retirement account?
You probably know what a retirement account is, but we’ll give you a refresher just in case. There are different types of retirement accounts, such as 401(k)s (probably the most popular one), Individual Retirement Arrangements (IRAs), 403(b)s, Roth IRAs, and more. Depending on which type of retirement plan you have, how it works may vary. For example, IRAs are opened by individuals, but 401(k)s are offered by employers. A 403(b) is a retirement account of certain tax-exempt institutions.
Retirement accounts usually offer some type of tax benefit. In turn, you save money, pay fewer taxes, and retire comfortably (the government’s incentive for you to save for retirement and avoid public assistance when you’re old!). It’s no wonder you’d want to protect this precious gold mine!
What happens to your retirement account without a prenup
If you don’t have a prenuptial agreement, you will need to go through the traditional divorce process. This means that your retirement account will be divided according to state law. If you are located in a community property state, then you could be looking at a 50/50 split of your retirement account. If you are located in an equitable distribution state, you could be looking at a 30/70, 40/60, 50/50, or any other combination of splits, depending on your situation. In addition, some states will consider the amount of the retirement you had prior to the marriage, as well, when dividing up the asset, not just what was accrued during the marriage. Moral of the story? It’s somewhat unpredictable as to what exactly will happen to your property because there are a bunch of different factors that play into it, such as your unique situation and your state laws. What is the best way to have a predictable outcome? P-R-E-N-U-P!
What could happen to your retirement account with a prenuptial agreement
Now, let’s imagine a world where you have a valid prenup to protect your retirement account. In that prenup, you made sure to outline your retirement account (among other properties) as separate property, not subject to division upon divorce. You end up needing a divorce and invoke your prenup. Your retirement account is safe and sound. The End! You live happily ever after.
Okay, but seriously, that’s actually how it would go. If you execute a valid prenup and mark your retirement account as separate property, not subject to division in a divorce, then your hard-earned money is most likely safe. It’s not rocket science, people! Get a prenup; it will help you!
Real-life case law on retirement accounts in family law
Let’s dive into some interesting family law cases surrounding retirement accounts.
From divorce court to… jail?
Pay close attention because we’re about to learn a very important lesson from Mr. Douglas DeGroot. Douglas and Katherine got divorced without a prenup and had to battle it out over their assets, including retirement accounts that had approximately $290,000 in Douglas’ name. The trial court declared that Katherine should get 50% of Douglas’ retirement accounts. When Katherine went to withdraw those funds, everything was gone. There was no money in the 401(k). The result? Douglas was held in contempt and sentenced to jail for 90 days. Not only that, but the court also ordered Douglas to pay Katherine an immediate payment of $50,000, followed by 96 monthly payments of $1,000 each. Douglas tried to fight this, but to no avail.
Moral of the story? If the court decides that your retirement account should be split up with your ex, don’t go hiding that money; otherwise, you could wind up in jail. Oh, and get a prenup! Douglas could have likely avoided this whole situation had he just gotten a prenup stating his $290,000 401(k) was separate property.
What about the gains and losses after the divorce?
What happens to retirement accounts in a divorce when the market dips and rises post-divorce? Do they get a fixed amount of money based on the divorce date, or are they subject to market gains and losses? Let’s find out what one Wisconsin court said about this topic. Susan and Daniel got a divorce, and in their divorce decree, Susan was awarded 35% of Daniel’s retirement fund, and Daniel was awarded 65%. The 401(k) plan consisted primarily of stocks. The stock market declined since the date of the divorce. Susan argued that she should be given the value of the 401(k) as of the divorce date, with no adaptation for the dip in the stock market. Daniel argued that she shouldn’t be given a fixed amount but rather an amount that fluctuates with the market until redeemed. Otherwise, Daniel will have to take on both his own losses and Susan’s losses in the market. The result? The court sided with Daniel on this one. They said if Susan wanted a fixed dollar amount, she should have asked the court for that in the divorce proceedings, but she did not. She got what she bargained for, and she probably wouldn’t be here requesting this court for a fixed amount had the stock market gone up.
Lesson to be learned here? Yes, you will most likely be subject to the losses and gains of the stock market if you are getting a cut of your spouse’s retirement fund. Why should they take the brunt of losses but not you? It works the other way, too. And don’t skip the prenuptial agreement!
Final thoughts on retirement accounts in prenuptial agreements
We’ve said it before, and we’ll say it again: if you want to protect your retirement fund, you should do so with a prenup. Whether you have a 403(b), 401(k), IRA, or any other type of retirement fund, a prenup is the only secure way to create a layer of protection for your money. Otherwise, you may wind up splitting your retirement fund in half or more, depending on your state laws and your specific situation. Don’t believe us? Check out the real-life stories of couples in the section above who ended up splitting their retirement funds 50/50 and 65/35. I bet if you ask them now, they’d probably say they wished they had a prenup. Just a hunch!
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: Nicole@Helloprenup.com
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