By Gary Allen Gardner
If divorce is on your horizon, you might want to consider suspending (or reducing) your contributions to your 401(k) or other retirement account. During the divorce, you and your spouse (or the judge) will have to decide how – and more to the point when – to divide your assets and debts. If you already have separate bank accounts, in some ways that makes the division, of your ongoing income during the divorce, easier and conceptually simple. The same can be said of retirement accounts. If you create a new retirement account at about the same time that you physically separate from your spouse, division along those account “lines” may make sense and seem fair to both of you.
There is no “bright line” at separation, or even necessarily at the divorce filing; your retirement account balances are, under Michigan law until a divorce decree is entered, still marital property. They are subject to division (50/50 perhaps) right up through the date of trial. But, if you live separately and are financially separate for a substantial period before the divorce judgment is entered, it is easier to argue that the balance in a post-separation (“new”) account should be treated as your separate property and the same for your spouse.
Similarly, take care to ensure that once you are divorced, the division and transfer of all retirement accounts is fully carried out. For instance, you and your spouse might agree to use part of the retirement funds to pay off certain debts or obligations and divide any remaining balance. If the debt payoff does not happen for a period of months (or years) and you continue contributing to that retirement account, you could find yourself unwittingly sharing with your ex-spouse a much greater remaining balance than you had planned because of monies you contributed after the divorce. You should talk with your divorce counsel and probably your financial advisor about these decisions, of course.
Financially speaking, it almost always makes sense to defer at least enough of your earnings into your retirement account to claim your company’s matching percentage; to do otherwise is to “leave money on the table.” But, you may want to start a new “stack” of retirement account monies on that table, if it is clear that a divorce and a division of assets is coming your way.