Should I stop contributing to my retirement account since we’re getting divorced? If this question has ever crossed your mind, don’t feel like you’re being sneaky. You’re not alone – nearly every client who comes to our offices asks this question. If your divorce court has not already issued an order restraining either spouse from changing retirement contributions, which many do at the outset of the case, then you do have options; and, if you are not yet divorcing, you have even more. Of course, you should always discuss your options with an attorney and, preferably, a financial planner, too. But there are common, universal pros and cons to changing retirement contributions. Here are a few:
Enrollment/Plan Periods: Check your plan for defined periods of time in which you can enroll, terminate or change your contribution amounts. For personal retirement accounts unrelated to your employment, this may be as simple as changing your deposit amounts online or calling your account manager. For employer-provided retirement accounts, the process can be more cumbersome, and you may find yourself having to wait for the new period to begin, and filing out several forms when it does. Check your plan, and you may find out the decision is already made for you.
Bankruptcy: If you are contemplating bankruptcy, you may want to continue your contributions. Generally, the more you have set aside in your retirement account, the better, because your retirement savings are exempt from liquidation in the bankruptcy court. This means, you do not have to use your retirement savings to pay your creditors, and you get to walk away from them with most, if not all, of your retirement savings in-tact. Beware, however, that you cannot cheat the system by pouring all of your money into your retirement account; the bankruptcy court may void the additional contributions and give that money to your creditors. If either spouse is headed toward bankruptcy after divorce, therefore, you may want to continue contributions at the maximum allowed amount – after discussing your options and risks with your divorce attorney and your bankruptcy attorney, of course.
Available Funds: Contributions to your retirement account are generally non-accessible, at least, not without paying taxes and penalties and/or proving a hardship. If you need funds during your divorce to pay temporary bills, such as rent for an apartment or attorney fees, you may want to temporarily discontinue your contributions. However, every extra dollar you have is an extra dollar you could be paying to your spouse as alimony or child support, or to your spouse’s attorney for fees, and may be counted as income for calculating long-term child support, alimony or ability to pay bills. So, if you are going to free up your funds by temporarily discontinuing your retirement contributions, be sure the funds go to a legitimate debt, plan to resume your contributions as soon as practicable (probably after your divorce), and be prepared to explain what the extra boost in your income should not count for long-term calculations.
Contributing Too Much: Do not pour every dollar into your retirement account in an effort to avoid paying alimony or child support. The divorce court may, and often does, assume that you are upping the contributions to avoid a support obligation, which you probably are, and will treat you as if you still have the dollars in your pocket. This means, you will be required to pay support at a presumably higher level, even though you do not have the dollars actually available at net income, and you may find yourself dipping into retirement, and paying taxes and penalties to boot, just to pay the support you could have paid had you not decided to contribute more.
Two Dollars In, One Dollar Out: In most states, each spouse’s retirement account is divided for the marital portion, generally meaning the value that accrued between the date of marriage and the date of divorce. The portion may be equal, or more or less, depending on your state’s laws and the factors in your case, and a prenup or postnup may govern how much, if any, to actually divide. As you begin thinking through the divorce process, you should start with the assumption that every two dollars you put in will result in one dollar going to your wife. Talk to an attorney about each spouse’s rights to a share of the account, as well as the manner and method of division (Does the now ex get cash? Does the now ex have to wait until I retire? Etc.) But keep in mind that, even if the account is divided equally, you still have funds, one dollar for every two, for yourself, too.
And what about your spouse’s accounts? The same pros and cons apply. Make sure you are watchful of what your spouse does, so you get what’s due to you.
