Divorce is never an easy process, whether you live in South Dakota or any other state in the US. And it’s even more complicated if you’re dealing with retirement accounts. Retirement accounts are marital assets that are subject to property division in a divorce. However, distributing retirement accounts in a divorce can be a complex process, especially if you don’t fully understand the intricate details involved.
In this article, we’ll take a look at South Dakota divorce and retirement dilution, what you should know, and how to minimize the potential impact on your retirement savings.
Marital Property vs. Separate Property
Before going into the specifics of retirement account division in divorce, it’s important to understand the concept of ‘marital property’ vs. ‘separate property.’
Under South Dakota divorce laws, marital property is defined as any property or debt acquired during the marriage. On the other hand, separate property is any property owned individually before the marriage or any property acquired by gift or inheritance. The process of dividing marital property can be complicated and involves identifying and valuing all assets, including retirement accounts.
Retirement Accounts in Divorce
Retirement accounts can often be one of the most valuable assets of a married couple. These accounts include 401(k)s, IRAs, and pensions. During a divorce, retirement accounts are classified as marital property if they were acquired or contributed to during the marriage. The portion of retirement accounts subject to distribution depends on the state’s laws and the terms of the divorce settlement.
Retirement Account Dilution
Retirement account dilution is a risk that many people face during divorce, and it occurs when a retirement account is divided between spouses. The risk comes from the fact that splitting a retirement account can reduce each spouse’s retirement savings potential.
Let’s say, for example, you have $500,000 in a 401(k) account, and half of that is awarded to your spouse during your divorce proceedings. That means both you and your spouse will each have $250,000 in separate accounts. However, because of the way compound interest works, your future balance will likely be less than $500,000. The more that’s taken out of your account, the greater the potential impact on your retirement savings.
Division of Retirement Accounts
In South Dakota, marital property is divided equitably between the parties. This means that the court will make a distribution that is fair and reasonable, but not necessarily equal. The court considers several factors when making this decision, including the length of the marriage, each spouse’s income and assets, and each spouse’s future earning potential.
There are several methods for dividing retirement accounts in a divorce. The two most common methods are the ‘cash-out’ and ‘split and roll-over’ methods.
Cash-Out Method
Under the cash-out method, one spouse is awarded the total value of the retirement account while the other receives other assets of equal value. This method is generally used when retirement accounts are only one part of a larger asset pool to be divided.
Split and Roll-Over Method
The split and roll-over method is the most common method used for dividing retirement accounts. It involves dividing the retirement account balance as of the divorce date between the spouses. The portion awarded to the non-account holder spouse is transferred to an account in their name, often a rollover IRA. This method allows each spouse to maintain their own retirement savings, but it comes with risks.
It’s important to note that IRA accounts require the transfer of funds to be done within 60 days, or there may be tax consequences. As such, it’s highly recommended to use a qualified transfer company to handle the division of retirement accounts to ensure that the transaction is done correctly.
Conclusion
Divorce is never easy, and dealing with retirement accounts can make it even more complicated. South Dakota divorce and retirement dilution can have a significant impact on your retirement savings. Understanding the process and utilizing the right methods can help you minimize the potential impact on your financial future.
If you’re facing a divorce in South Dakota, it’s important to engage the services of a qualified and experienced divorce attorney who can guide you through this difficult process. By working with a professional, you can minimize the risks and protect your retirement savings for the future.