Like other assets and debts in a divorce, the court expects you to characterize each retirement account as “community property,” “separate property” or a mixture of the two.

Briefly, the law views as separate property that which arose before the date of marriage, after the date of separation, or by virtue of gift or inheritance.  Community property is the remaining property that arose between the date of marriage and the date of separation.

characterizing retirement accountsSeparate property

Here are some examples:

  • An IRA that was contributed to before the date of marriage but not since;
  • A 401k that has only been contributed to since the date of separation;
  • A Roth IRA that was funded during the marriage solely by money received from an inheritance.

In a divorce, separate property is normally simply confirmed as belonging to the spouse who is legally entitled to it.

Community property

A couple examples are:

  • A 401k for a prior job that was only contributed to during the marriage;
  • A current-job pension that started during marriage, assuming separation has not yet occurred.

Mixed (partly community and partly separate) property

Two examples:

  • An IRA that was contributed to both during the marriage and before it;
  • A current-job pension that started during marriage and participation is continuing since separation.

Community and mixed property are usually divided somehow in a divorce.  With mixed property, the portion that is separate is often confirmed as belonging to the spouse who is entitled to it.  If so, then only the community property portion is divided.

This brings up an important question regarding mixed property.  How much of it should be considered separate and how much should be considered community?  When you work out your own settlement, perhaps with the assistance of a divorce mediator, you can answer this question, and everything else concerning the division of your assets and debts, in whatever way you can agree  upon.

Time Rule

When the court is called upon to divide a mixed defined benefit (pension) plan, it most often uses the so-called “time rule” to determine the sizes of the separate and community property interests.  This works as follows:

  1. Determine the number of months of participation in the pension plan between the date of marriage and the date of separation.
  2. Determine the total number of months of participation in the plan.
  3. The community property interest percentage is then 100 times 1 above divided by 2 above.

For example, if there were 8 years (96 months) of participation during the marriage and 10 years (120 months) of total participation, the community property percentage would be 100 * 96 / 120 = 80%. The remaining 20% would be the separate property interest of the plan participant.  If each spouse receives half of the community property percentage of 80%, this means that the community property share for each spouse is 40% of the total pension value.

The time rule formula assumes that the amount of retirement benefits is substantially related to the number of years of service.  If the amount of benefits is more dependent on some other factor, a different formula or approach may be needed.

The time rule method can also be used to come up with the separate and community property interests in a mixed defined contribution plan such as a 401k or an IRA.

However, another and perhaps more accurate way to determine the separate and community property interests in a retirement account like an IRA or 401k is to use the periodic statements for the account.  You will need statement(s) issued around the date of marriage and/or date of separation.

Name on the Account

Note in the above analysis that it doesn’t matter whose name is on the retirement account.  This is often a rude awakening to a divorcing spouse who mistakenly thinks the law entitles them to keep the retirements accounts that are in their name.

Vesting

Being fully vested means that you are entitled to all the benefits of the retirement plan.  It may take years to become fully vested in some plans.  Sometimes at the date of separation, a plan participant is not yet fully vested.  In this situation, California law treats non-vested retirement benefits as community property.

Survivor and Death Benefits

Pensions often have survivor and death benefits.  The community property portion of the pension normally includes these survivor and death benefits.