Retirement Benefits and Divorce Agreements:

Estimated reading time: 3 minutes(Last Updated On: November 30, 2018)

Divorces can be one of the worst experiences of a person’s life. Even if divorce presents the best path forward, the process can be time-consuming, expensive and filled with uncertainty and stress. One of the more stressful aspects of divorce is the division of marital assets. Sometimes couples will seek to do planning ahead of time to lessen the potential issues later, and to make things as easy as possible if they ever do split. One way that an increasing number of couples are factoring in retirement benefits and divorce is through a prenuptial agreement.

Prenuptial Agreement Basics. You might already have a general idea of what a prenuptial agreement is – an agreement that two individuals make before getting married which specifies how certain financial matters will be handled if they ever divorce (or if they divorce under specific sets of circumstances). Most prenuptial agreements specify that whatever property and assets a spouse brings into the marriage will remain solely the property of that individual in the event of divorce. The agreement will also specify how new assets – that is, property that’s acquired by the couple during marriage – will be divided in the event of a divorce.

IRAs are Generally Subject to Divorce Settlements. One mistake that people often make when contemplating a prenuptial agreement is to assume that an IRA that they set up before marriage will remain outside of any property distributions that happen in connection with a later divorced. Unfortunately, that’s not necessarily the case. Depending on which state’s law governs a divorce proceeding, an individual may find that at least a significant portion of their IRA could be subject to division. A prenuptial agreement can help reduce the uncertainty by specifying how the individuals getting married want that to be divided.

Prenuptial Agreement Uncertainty. Just because two individuals have signed a prenuptial agreement, that doesn’t mean that a court will necessarily enforce it. The majority of the states in the U.S. have adopted some version of Uniform Premarital Agreement Act, which sets forth certain requirements that must be met before a court will enforce a prenuptial agreement. Before entering into any prenuptial agreement, check the laws of your state.

Contributions After Separation but Before Divorce. Without a prenuptial agreement, a couple who separates but does not legally divorce may still be able to make claims against the other’s IRA, even if a new account was started after the separation, if any “marital property” was used to fund the account.

If you’re prenuptial agreement specifies for a particular division of IRA assets, be sure to effectuate that decision only after your divorce is final. Any division of IRA assets must still conform to the general rules on IRA distributions, regardless of what the parties have agreed. Current IRS rules require that any separation agreement must be approved by a court before the division can be made without incurring penalties.

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