If you’re a tech entrepreneur, celebrity, or other high-net-worth individual you’ve most likely built a substantial retirement plan over the years. In fact, this could be one of the biggest groups of assets that you and your spouse share. For high-net-worth couples divorcing in California, it’s vital to understand how the law will determine the division of your retirement assets.

Information About Pension and Retirement Plans in Divorces

In the state of California, all forms of income that each spouse earns during the course of the marriage are considered shared property. Additionally, defined contribution accounts such as 401(k), 457, or 403(b), and even IRAs and SEPs are considered shared property. In addition to defined contribution accounts, pension plans are also considered shared property.

On the other hand, if a spouse opened a retirement account before getting married, they can potentially claim any contributions that they made to these accounts before the marriage as separate property to prevent the division of these funds with their spouse upon divorce. Moreover, under California law, interest earned on contributions in these cases is considered separate property. 

What Happens to Retirement Accounts in a California Divorce?

Federal law governs defined contribution plans and how payments under the plans are made if divorce occurs. If a high-net-worth spouse such as a real estate mogul has a defined contribution plan that’s considered shared property, a California court will issue a Qualified Domestic Relations Order (QDRO) as part of the divorce. A QDRO gives the plan administrator the authority to make payments to the ex-spouse.

Additionally, a QDRO allows the ex-spouse to withdraw funds from the defined contribution account and deposit them into other retirement accounts without receiving early withdrawal penalties. QDROs only apply to retirement accounts under the Employee Retirement Income Security Act (ERISA). Therefore, QDROs do not distribute assets from stock options, excess benefit plans, and supplemental executive reimbursement plans.

It’s important for individuals such as executives of fast-growing technology companies to note that a QDRO is not necessary for the court to divide assets from IRA and SEP accounts. Unless the divorce decree stipulates that withdrawals and transfers by the ex-spouse are under Section 408(d)(6) of IRS Code (making them tax-free), the ex-spouse will pay early withdrawal penalties and income taxes on the money that is withdrawn. 

The division of retirement assets in a California divorce can be complex. Celebrities and professional athletes that aren’t familiar with the process can end up making costly mistakes that will seriously impact their personal finances for years to come. Therefore, high-net-worth individuals dealing with a divorce in California need to find an experienced divorce attorney that they can trust to ensure their interests are protected in cases of complex property divisions.

At Silva & Associates, we help tech entrepreneurs, real estate moguls, and other high-net-worth individuals understand how their retirement assets will be divided in a California divorce. Contact us today to learn more.