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Renee Hanson

Financial Planning > Trusts and Estates > Estate Planning

What Happens to 401(k)s, IRAs When Older Clients Get Divorced

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The first shots of the “gray divorce revolution” in the U.S. — couples ages 50 and older — were fired near or around the turn of the new millennium. Indeed, their rate has increased steadily ever since.

By 2030, in fact, gray divorces are projected to triple, according to studies by Bowling Green State University, which, in 2012, found that even divorce rates for couples over 65 had more than doubled in the late 1990s through early 2000s.

A divorce prenuptial or postnuptial agreement can make the complex — and painful — process of dividing retirement assets between wealthy older spouses less crushing.

This “is an excellent way to [sort out finances] when “until death do us part” turns into “until divorce do us part,” argues certified divorce financial analyst Renee Hanson, an Ameriprise Financial private wealth advisor, in an interview with ThinkAdvisor.

The rise in divorces among retirement-age couples is delivering a robust flow of clients to financial advisors specializing in the financial aspects of divorce. Critical to these couples is how to split up their 401(k)s, IRAs and pensions.

In the interview, Hanson — who works for Affinity Wealth Advisory Group in Phoenix has made Barron’s Top 1,200 financial advisors list for nine years, including this year — explains, for starters, the difference between sole and separate assets and marital assets.

Her discussion of the division of retirement assets focuses on community property states, of which her state is one, along with California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Non-community property states — which apply common law — typically observe state law equity distribution guidelines, wherein courts try to achieve a fair allocation of property.

As a CDFA, Hanson helps with the divorce process by organizing the spouses’ finances, helping with the negotiation and preparing reports to ensure the settlement outcome.

In the interview, the advisor, a Forbes Best-in-State Wealth Advisor from 2019 to 2023, teases out the intricacies of splitting up a 401(k) account as well as an individual retirement account, including the tax implications.

The certified financial planner also covers the division of a pension in divorce, inherited IRAs and other gifts, and when to bring aboard a forensic accountant.

ThinkAdvisor recently interviewed Hanson, an accredited portfolio management advisor, who was speaking from her Phoenix office.

She cautions couples to “think carefully about the types of assets they’re accepting in their negotiated settlement.”

That certainly makes sense:

“Frequently a spouse may sacrifice income-producing assets for a house that oftentimes will require additional maintenance and repair funds,” she provides as an example.

Here are excerpts from our conversation:

THINKADVISOR: Should couples have a prenuptial agreement solely about divorcing, if that should ever be in the cards?

RENEE HANSON: That would be wonderful advice for your readers.

We get into business relationships [based on] the way the relationship looks when we’re in it and when we exit. All the finances are determined.

And yet we don’t do that for marriage. A pre-nup or even a post-nup is an excellent way to [sort out finances] when “until death do us part” turns into “until divorce do us part.”

Why is gray divorce on the increase?

I’m not quite sure if people realized they were going to live so long. Now the person you selected gives you pause for thought.

There are three categories: [The first includes] people that have been married for a long time, are complacent in the relationship and are looking how to get out of it.

The second are those that have been married for a long time, realize they’re probably going to live a lot longer and would like to have a higher degree of happiness. So they’re willing to divorce now.

The third category: those who are counting how much longer their spouse might live — determining the length of life they have left — to see if they’re going to stay in the marriage.

Is it usually the wife who says, “Let’s call it quits” first?

I don’t see that it’s just the women. I see both parties. But when I get referrals from professionals, more frequently they’re the [wives].

Are the parties absolutely certain they want to divorce? Do they know by the time they see you that the marriage is over?

The professionals in the divorce arena usually ask that very question first: Is the marriage salvageable?

They always encourage marriage counseling because it’s cheaper for two to live together than one, and dividing assets in half can be disconcerting.

To what extent does the lawyer look to you and your expertise in these cases?

I get most of my referrals from family attorneys and mediators.

I help them significantly in organizing the finances, preparing reports to assure people of the outcome and helping in the negotiations.

All divorces have three parts: First is the division of assets and debt. The second is spousal maintenance and calculation. The third is child support, if minor children are involved.

Suppose a wife needs more than 50% of the couple’s assets because she has no money of her own, has never worked outside the home and has no job prospects?

That’s where a certified divorce financial analyst, like me, can help both parties understand the assets they have, the expenses they can expect to incur and what’s a reasonable solution.

Let’s talk about dividing a wealthy couple’s retirement accounts. What happens with a 401(k)?

The employee — let’s call them Spouse 1 — is the owner of the account. But that doesn’t mean they’re entitled to all the assets.

If a couple was married after Spouse 1 — the husband, say — worked for his employer for 10 years and continued to contribute to the 401(k), the assets and gains and losses realized are marital assets. Spouse 2 — the wife — is entitled to a portion of those marital assets.

The first step is determining what is sole and separate assets and what are marital assets.

Sole and separate assets that are brought into the marriage such as an inherited asset or a gift that was received aren’t commingled.

In a community property state, sole and separate assets remain sole and separate. Marital assets are assets accumulated during the course of the marriage.

I imagine that in some marriages, the asset division can be negotiated between the two parties?

Divorce is always a negotiation. But in a negotiation, one party is giving up something to get something else.

Generally, a spouse isn’t going to offer up any sole and separate assets for division.

What else is important to know about dividing assets in a 401(k) account?

401(k) plans aren’t simply divided by [divorce] decree. They‘re divided by qualified domestic relations order [QDRO], pronounced Quadro.

Dividing a 401(k) seems to be so cut and dried. Is it?

If there’s a loan involved, it may not be so cut and dried. You can borrow from a 401(k), and the loan is repaid by payroll deductions. So if Spouse 1 owns the 401(k), the loan is repaid by deductions from their paycheck.

That could muddy the waters, couldn’t it?

You mean Spouse 2 won’t receive as much money?

Correct.

Please discuss the tax implications regarding division of a 401(k) account.

Once the QRDO is received by the plan administrator, they separate the assets. Spouse 2 can choose to roll [their share] into an IRA, and all of that is without tax consequences.

If Spouse 2 decides to take the money out, there’s a special tax rule under divorce that if you’re younger than 59.5, you can receive some of the 401(k) money without the 10% tax penalty for early distribution.

Please explain dividing an IRA.

They’re divided by the divorce decree, which documents the agreement between the two parties — whether one gets half or one gets 20%. That’s agreed to by the parties and approved by the court.

One of the spouses provides it to the financial institution, and the IRA is divided according to the order in the decree.

What if money was in a spouse’s IRA account before the marriage, or they opened one after marriage and the other spouse added money to it over the years?

Is the latter spouse entitled to IRA money as part of the divorce settlement?

If it was money earned in the course of the marriage or distributed in the course of the marriage, it’s generally considered a marital asset and subject to division.

If it was funded before marriage, it’s considered a sole and separate asset and is not included in the division of assets.

They may have each contributed to their own individual IRA post-marriage.

What if one of the spouses inherits an IRA? Is that considered a marital asset?

No. It’s a sole and separate asset. It always remains titled as an inherited IRA and not subject to division.

Say the husband has been receiving a pension. How does that get divided?

If they’re already receiving the pension’s payout, depending on how the plan documents are written, the recipient may want to continue to maintain the income, particularly if there’s a 100% survivor benefit, meaning that if he passes away, [the wife] would get the benefit.

If they’re not receiving income yet, it can be divided by a QDRO, similar to [the situation with] a 401(k).

Is it a good idea for a married couple to commingle assets?

You’re asking a professional that thinks in black and white. My answer is no, I don’t believe you should commingle assets unless you have clearly [documented in writing] how to unwind them.

Sometimes a spouse has hidden assets — like an offshore account or another way of hiding money from their spouse. Where does that come in when dividing a couple’s assets?

The process of finding hidden assets is usually [executed] by a forensic accountant. They’re going to go through the statements to determine, say, if money was moved offshore.

Once anything is found, it’s subject to the same rules as to whether it was sole and separate or marital [assets].

Are the services of a forensic accountant routinely enlisted for every divorce, or just when there’s a suspicion of hidden assets?

With suspicion.

Have you ever had a case like that?

I’ve worked on cases where a forensic accountant was hired to determine where money was spent on what is called “waste” — like when someone wasted money on drugs or addicted behavior. Frittered it away.

These people might have addictions that require a lot of money. That’s considered recoverable.

In a gray divorce, how are debts split up?

Debts are typically divided just like the assets.

You’ve said, “Be careful giving up too much to keep the house.” What’s your reasoning behind that?

Women, particularly, want to keep the house because they want to maintain a semblance of normalcy for family members.

So, frequently a spouse may sacrifice income-producing assets for a house that oftentimes will require additional maintenance and repair funds.

We caution people to think carefully about the types of assets they’re accepting in their negotiated settlement.

Did you start out as an advisor wanting to specialize in the financial aspects of divorce?

No. I wanted to help people be successful financially. I [soon] realized that people experience transitions in their lives, divorce being one of them. It was a niche specialty I wanted to address.

Pictured: Renee Hanson


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