How to Divide Retirement Accounts During a Divorce in Wisconsin
Retirement accounts are considered marital property and therefore split equally between the divorcing parties. The most common accounts are divided as follows:
- IRAs – Divided with the process “transfer incident to divorce”
- 401(k) – Divided using a “Qualified Domestic Relations Order” (QDRO)
- 403(b) – Also known as pensions use a QDRO
Retirement accounts are considered marital property and therefore split equally between the divorcing parties. As explained in Wis. Stat. Section 767.61, Wisconsin is one of 9 states that are labeled community property states, which means that everything that is owned by a married couple is subject to a 50/50 split in the event of divorce.
Types of Retirement Plans to Divide
There are three major types of retirement plans that need to be considered when a divorce occurs; defined benefit plans, defined contribution (401 K) plans, and social security benefits.
Defined Contribution Plans – 401(k) & 403(b)
These retirement plans require employees to contribute a fixed portion of their paycheck.
- 401(k) plans: These are employer-sponsored retirement accounts that dedicate a portion of the employees pre-tax salary to a retirement account.
- 403(b) and TSA plans: A 403(b) is an example of a tax-sheltered annuity (TSA) plan. They allow certain employees of public schools and tax-exempt organizations to save for retirement through contributions from both employers and employees.
- IRAs (IRA, Roth IRA, and SEP plans): IRA’s, Roth IRAs, and SEP IRA’s are three types of similar retirement accounts. Traditional IRA’s allow employees to pre-tax their income, which allows for an upfront tax break. Roth IRA’s work in reverse, meaning the employee will not receive any upfront tax deductions, instead they will receive a tax break later meaning any money withdrawn will be tax-free. SEP (Simplified Employee Pension) Plans allow self-employed individuals to provide a basic retirement plan for themselves and any of their employees. Like the traditional IRA, employers can take a tax deduction for their contributions to an SEP IRA.
Defined Benefit Pension Plans
Defined benefit plans, or pension plans, are employer-sponsored retirement plans. The employer agrees to a specified payment on retirement that is calculated using a formula that considers multiple factors, such as your salary history and length of employment.
- Wisconsin Retirement System: The Wisconsin Retirement system (WRS) is a hybrid defined benefit plan that contains both a defined contribution plan (401(k)) and a defined benefit plan. This means that it includes both an Employee account and an employer account.
Social Security Benefits
In some instances, social security benefits are considered marital property. In Wisconsin, if a marriage lasts longer than 10 years, both spouses are entitled to social security. Collection on a spouse's social security benefit can begin at age 62. This will remain true until either party gets remarried.
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Methods of Division
When dividing retirement accounts, there are two common ways to divide the assets in a way that guarantees both spouses receive an equal portion of the marital assets involved.
Important Note: Before any division can take place, the retirement accounts of both spouses must first be appraised to determine the present value of the account, and what percentage can be classified as “Marital”. This requires the work of an actuary, or a financial professional who can provide guidance as to how the accounts should be valued.
Trading marital property for retirement assets is a very common method of division in divorce. For example, if the retirement account is valued at $100K, and the family home has $100k in equity, one spouse could keep the full retirement account and the other spouse could keep the family home. This would be an example of an equal trade of assets.
Splitting marital property and retirement assets is another solution. Typically at the end of a divorce, parties with multiple 401(k) accounts will use a QDRO to equalize retirement accounts. An example of this would be one spouse has $250k in a retirement account while the other spouse has $50k in a retirement account. In this scenario the spouse with $250k in their account would draw down their 401(k) via a QDRO transferring $100k to the other spouse to equalize the retirement account values. The QDRO is a legal procedure used to divide retirement accounts without penalties. Read more about QDROs below.
Building a Property Division Plan
When building a property division plan, it is easier to work with your spouse to prioritize finances, debt, and property rather than letting the courts decide(3). To build a property division plan, you must:
1. Create a List of Assets
The easiest way to start is with each spouse creating a list of assets and identifying which spouse should receive the asset once the divorce is finalized. It is natural to have disputes at this stage, but the best results come from working together to find a solution to determine who should get the property.
Transparency is crucial when identifying assets such as retirement accounts, pensions, real estate, bank accounts, insurance policies, vehicles, and anything additional that holds value. If one spouse fails to disclose an asset, whether or not it is intentional, the judge may reopen that case and there may be penalties associated with failing to disclose.
2. Value the Property
The next step is to determine what the property is worth. The fair market value for each item is generally accepted by the court. Fair market value is understood to be what you can get for the item on the open market today, not what you had originally paid for it. There are many resources that can be used to determine asset worth.
3. Determine Marital or Separate Property
Since Wisconsin is a community property state, any asset that is claimed to be separate will need to be proven to a judge by showing the date it was purchased, how it was paid for, and how the property was kept separate during the course of the marriage.
4. Determine Marital Debt
Debt is also included in property division during a divorce. Joint debt will be split evenly between spouses. Individual debt, if not used for marital purposes, will be the responsibility of the owing spouse.
5. Create a Property Settlement Agreement
If both spouses can agree on all aspects of the property and debt division, a property agreement must be created and presented to the judge. This agreement should list each asset and debt, the value, and the owner. If you have any reservations on the result of the property division, consult an attorney before the agreement is signed.
Start Dividing Property & Debts
Get your WI property division worksheet here. Document property, assets, and debts. Think through how you want to equalize your property division, and avoid a lengthy battle in court.
Are you ready to move forward? Call (262) 221-8123 to schedule a strategy session with one of our attorneys.
Frequently Asked Questions
Do I get half of my husband's 401K in a divorce?
You can get half of your spouse’s 401k if they added to it during the marriage. If it is an account from before the marriage that wasn’t added to during the marriage, they may be allowed to keep it to themself. 401ks are divided between the parties during the property division process.
How is a 401K split in divorce?
There are a few ways 401ks and other retirement accounts can be split in divorce. If there are two or more accounts that could be split to similar values, each party could get their own account. Or you can split a 401k into two accounts, but you need a court order to do this.
The final option is to allow one person to keep the 401k and let the other party have something of equal value. This option can be unbalanced though because you also have to think of the future gains of the 401k.
How many years do you have to be married to get your spouse's 401K?
If they added to the 401k during the marriage, you will likely be able to get half of the 401k. But, if it can be tracked, you may only get half of the money they put into the account during the marriage. The longer the marriage is, the more likely the court is to rule against a retirement account being separate property.
Do you have to cash out your 401K in a divorce?
It is rarely in your best interest to cash out a 401k during a divorce. If you cash it out early, you will not get the full amount and waste money unnecessarily. The best thing to do is to keep your money invested and get help from an attorney.
Can my wife take my retirement in a divorce?
You may be required to split your retirement in a divorce. Even if only one party put money into that account, the court assumes that the other party spent time and money adding to the marital estate in other ways.
What happens to your retirement when you divorce?
Retirements get split just like any other asset in a divorce. This means it could be split in half like a savings account or it could go to one person if the other party takes something of equal value.