By Jennifer M. Paine
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 guy who comes to a Cordell & Cordell office 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. If you are not yet divorcing, you have even more.
Here are three common, universal pros and cons to changing retirement contributions:
1. 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 filling out several forms when it does.
Check your plan, and you may find out the decision is already made for you.
2. 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 intact.
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.
3. 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 her 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 why the extra boost in your income should not count for long-term calculations.
And what about your spouse’s accounts? The same pros and cons apply to hers, too. Make sure you are watchful of what she does with hers, so you get what’s due to you.
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Jennifer M. Paine is a Michigan Divorce Lawyer with Cordell & Cordell. She is licensed to practice in Michigan, and has been admitted pro hac vice in Illinois, Ohio, and the United States Court of Federal Claims.
Ms. Paine received her BA in English and Mathematics from Albion College and graduated Summa Cum Laude. She received her Juris Doctorate from MSU College of Law and graduated Summa Cum Laude.