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How does a gray divorce affect retirement?

On Behalf of | Jan 17, 2024 | Family Law

While overall divorce rates have fallen, there is a demographic that is seeing an increase in divorce. Older adults who have been married for decades are divorcing their partners in what is called a ‘gray divorce.’

While a gray divorce has many unique challenges, one of the biggest concerns for both parties is the financial impact it will have on the couple’s retirement funds.

How are retirement funds divided?

Virginia is an equitable distribution state. Unlike a community property state, which divides marital assets in a 50/50 split, Virginia courts will look at several factors to ensure each party receives a fair share.

The concept of ‘fair and equitable’ also applies to retirement accounts. Any retirement accounts from before the marriage are considered to be separate property. However, any retirement created and contributed to during the marriage is subject to division during a divorce. This includes 401(k)s, IRAs, pensions and other investments.

There are two exceptions:

  1. Assets in a defined benefit pension account can’t be divided until retirement
  2. The division of a retirement account can’t exceed 50% of the marital share

Many times, both spouses are working and contributing to their own 401(k)s. However, one spouse may have a larger income and contribute more. A judge may require a Qualified Domestic Relations Order (QDRO) to ensure that retirement accounts are appropriately divided. This legal document orders the split and transfer of a retirement plan between divorcing spouses without penalties. The spouse receiving the funds can then create their own retirement account. Sometimes, the spouse with the retirement account may give up their share of other marital assets to protect their investments.

The division of retirement funds can be complex, and there are many factors to consider, such as tax implications and the accounts’ current and future value. Working with someone who can help you review your options and make the best choice for your future financial security is crucial.