Retirement and Investment Accounts in a Maine Divorce

Asset division is one of the necessary tasks in a divorce. When people think of assets, they often think of tangible items such as real estate, vehicles, and expensive jewelry or art.

However, divorcing couples usually have at least a few intangible assets, such as IRAs or pension plans.

These things must be distributed equitably under Maine divorce laws. Due to their intangibility and tax laws, this can be a difficult process.

When you have the knowledge of a seasoned Maine family law attorney on your side, rest assured, every step will be taken to get you what is rightfully yours. 

Generally, each spouse in a divorce should receive half of the assets that were acquired during the marriage. However, if one spouse had a retirement or investment account for several years prior to their legal union, this can make the division of these assets even more difficult. 

In most cases, the spouse who had the account will need to split what was earned during the marriage with the other spouse.

Some investments may be considered separate property if they were purchased prior to the marriage and inactively remained in a separate account during the entire marriage.

It is imperative that you have an attorney represent your interests so that you get what is equally yours when it comes to the division of investment and retirement accounts. 

Taxes are another factor that can make the division of retirement and investment accounts challenging to divide.

The tax implications of dividing assets like IRAs should be considered when the assets are divided.

Unfortunately, the tax code does not explicitly address the possibility of couples transferring assets to each other without incurring taxes on appreciation.

You need to be keenly aware of any tax consequences you will be subject to during and after the division of these types of assets. Your Maine family law attorney can help you understand them so that you can make the best decisions in your unique circumstances. 

Like many states, Maine follows the “equitable distribution” model of marital property division. This means that if the matter of property division goes to court, a fair distribution of assets will be adjudicated.

That does not necessarily mean an “equal” or “50-50” split but it may do, depending on circumstances. The court will not only consider the assets themselves but other factors such as each spouse’s expenses, available resources, their respective earning potential, and their overall contributions (financial and non-financial) to the marriage.

The marital home cannot be divided down the middle. Often, if there are minor children, it is in their interests to remain in the family home with the primary custodial parent. The noncustodial parent may be compensated for “losing out” on the marital home from other assets, which will be divided accordingly.

However, this is not always possible. Sometimes, the property must be liquidated and the proceeds divided.

In Maine divorces, marital property not only includes the home, savings balances, pension plans, and businesses. It also includes workplace retirement accounts like 401k plans, which may be considered “fair game” for spouses in property division settlements.

If you are concerned about protecting these assets during a divorce, you may be able to take steps to help prevent unnecessary losses.

Start by contacting an experienced property division lawyer. Many legal requirements and terms/conditions must be met before your 401k assets can become anyone else’s property.

So, you must first check whether your plan is vulnerable to property division rules in Maine and contact your 401k plan administrator to understand the regulations.

From here, you can calculate which of your assets are vulnerable and create a financial plan to cover these losses if the divorce proceedings go that way.

Try to educate yourself about your plan and familiarize yourself with the options available. This will help you ask the right questions in consultation with professionals and protect any assets that can be protected.

Some married couples are prepared for the possibility of separation and divorce with prenuptial agreements (“prenups”) or postnuptial agreements.

The adoption of the Uniform Premarital Agreement Act in Maine ensures that these agreements are recognized by the courts providing they are in writing.

If you have a prenup, check exactly what you agreed to. Sometimes, they only protect contributions before the marriage date — in which case, contributions made during the marriage may still be subject to equitable distribution.

During your divorce, you may consider taking a lump sum from your 401(k) plan or another traditional pension plan to cover divorce-related legal expenses or for other reasons like the costs of moving. Your spouse may also seek to do this, so you should be ready for it.

Think about this carefully and discuss your options with your property division lawyer first. Withdrawals before the age of 59½ usually involve a 10 percent penalty. This can unnecessarily reduce the funds available to you in retirement so it is best not to take the decision lightly.

If you are the initiator of the potential 401(k) cash-out, you will likely need to accept the 10-percent loss. The withdrawn money will also be considered taxable income, incurring extra taxes and potentially worsening the financial situation.

However, if your spouse is the initiator, ask your property division attorney about a Qualified Domestic Relations Order (QDRO). This is based on the contents of the divorce decree, which should specify the applicable amounts in the division and when it will take place.

A QDRO in the event of divorce is one of the few exceptions to the 10-percent-penalty rule. It will specify how your spouse is paid from the plan and the lack of a penalty can make it less of a financial “hit” for you.

Your property division lawyer can contact the plan’s administrator to take the necessary steps for a smooth transfer of funds. If more than one account is to be split, a separate order is required for each account.

This process can be complicated so make sure that you entrust it to a divorce attorney with the required financial knowledge and expertise to handle it.

Individual retirement accounts (IRAs) are other major retirement assets sometimes overlooked by individuals in divorce discussions.

A Qualified Domestic Relations Order may not be required to transfer these assets over but you will still need to ensure that the split is done properly to avoid unnecessary tax or a 10-percent penalty for withdrawing before the age of 59½.

If 401(k) funds are transferred to a rollover IRA in a “trustee-to-trustee” transfer, a QDRO must specify that. This transaction is not taxable for either the 401k account holder or the recipient

It’s important to talk through the tax implications of all these types of transactions before acting so that you are aware of the full financial consequences of the property division.

The bank or brokerage that looks after your IRA will require a copy of the divorce agreement and you will need to complete the necessary paperwork. There must be a “rollover” IRA account set up to receive the funds too.

Note that Roth IRA withdrawals are handled differently from traditional IRA withdrawals because the contributions have already been taxed — again, discuss with your property division lawyer to understand the full implications of a withdrawal before acting.

Retirement and investment accounts grow in value long before they are accessed. Even though many of these benefits were accrued over the course of the marriage, it could possibly be several decades before they are used.

This fact provides choices about how couples wish to pursue their division, but it also makes the division more complex.

One option is to wait until the benefits are paid out and collect your share then. The downside for some spouses is that it keeps them connected much longer than they prefer to be.

Another option is for one spouse’s share to be discounted to its present value. Then the spouse pays it to the other spouse, or it is offset by additional assets. 

There are a few other things to be careful of when arranging what happens to your 401k during a divorce:

• Do not change the beneficiaries before the divorce is finalized unless your spouse agrees to it.
• If the intent is for each spouse to get a percentage of the 401k assets, the divorce decree and QDRO should state that percentage rather than a fixed amount.
• If you are facing bankruptcy, assets in 401(k)s are protected but those in IRAs are fair game for creditors.

Contact a Maine Retirement & Investment Account Division Attorney today

The Maine Divorce Group has the experience helping family & divorce clients fairly divide their investment and retirement accounts to their benefit. If your divorce involves these types of assets, don’t risk losing them.

Call us directly at (207) 618-6220 or contact us online today to schedule your case review and find out how we can help.