Understanding the Impact of a Prenup on Retirement Accounts

Jan 30, 2023 | Prenuptial Agreements, Protecting Assets

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 fund. We totally understand. A prenup 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. 

Prenups only “work” if they’re valid and enforceable. If you have an invalid prenup, you have no prenup at all! What is considered a valid prenup will vary from state to state, as prenup law is governed by each state. For example, what is considered a valid prenup in New York may not be considered valid in Minnesota. 


What is a retirement account? 

If you clicked on this article, 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 prenup, you will need to go through the traditional divorce process. You will have to debate over the issues in a divorce the hard way. The issues you will need to come to terms with your ex-spouse are usually property division, alimony, debt allocation, and child matters (among other issues). Retirement accounts fall under the category of property division. You will need to work out how all of your assets will be divided. That means, who gets the house, who gets the car, and who gets the bank account, or will we split it all? If you cannot decide amongst yourselves, then a court will need to step in and make those decisions for you. If you had had a prenup, these major decisions (except child matters) would’ve been decided already at a time that wasn’t emotionally heightened as a divorce. 

Okay, so what actually happens to my retirement account without a prenup!? Well, that really depends on which state laws apply to your divorce and your specific situation. If you are located in a community property state, and your retirement fund was accrued during the marriage, then you could be looking at a 50/50 split. 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. Moral of the story? It’s somewhat unpredictable as to what exactly will happen to your “stuff” because there are a bunch of different factors that play into it. 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 prenup

Now, let’s imagine a world where you got 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 fund 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 fund 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 

Let’s dive into some interesting family law cases surrounding retirement funds. 

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 a retirement fund that had approximately $290,000 in Douglas’ name. The trial court declared that Katherine should get 50% of Douglas’ retirement fund. When Katherine went to withdraw those funds, everything was gone. There was no money in the 401(k). Dun, dun, dun. 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 fund 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 funds 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. If the stock market skyrockets, you would also get the benefit of the gains in that same scenario. The even bigger lesson? Get a prenup. Daniel could’ve avoided this whole headache had they had a valid and enforceable prenup dictating his 401(k) as separate property. His 401(k) would’ve been safely segregated from the marital pot and not subject to division. 


Final Thoughts 

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 that 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! 


You are writing your life story. Get on the same page with a prenup. For love that lasts a lifetime, preparation is key. Safeguard your shared tomorrows, starting today.
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