Suggestions how to handle retirement funds in a prenup?
December 15, 2019 6:53 AM Subscribe
How to keep management of separate and marital retirement funds simple and equitable?
My fiance and I are jointly writing a prenup with input from our separate attorneys. One area we are struggling with is how to equitably and simply handle retirement funds. We would like to keep at least some of our individual retirement funds as separate non-martial property. The question in our minds is how to fund retirement equitably for the spouse who has a lower income or may stop working for some period voluntarily (e.g. to help raise children) or involuntarily (e.g. they were laid off).
Out attorneys have proposed a system where each indvidual can fund their separate retirement up to a certain percentage of their gross income. Any funding of retirement beyond that percentage becomes marital or joint funds. This seems problematic too us from a number of perspectives.
Using a fixed percentage may make it difficult to maximize retirement benefits and doesn't really incorporate changes in income with time. Also either keeping track of what is separate versus marital if they are in the same accounts with multiple investment vehicles/funds seems really complicated and a hassle. If the separate and marital retirement funds are kept totally separate this also seems problematic as now almost double the number of funds need to be managed and the benefits of scale are lost (e.g. Vanguard Admiral versus non-Admiral funds).
Any suggestions on how to handle retirement funds in a prenup that is simple to manage? Especially in a way that keeps some retirement funds separate?
How did you and your spouse structure retirement funds in your prenup?
You are not my lawyer/attorney and I am not considering this legal advice just suggestions on how things might be structured.
My fiance and I are jointly writing a prenup with input from our separate attorneys. One area we are struggling with is how to equitably and simply handle retirement funds. We would like to keep at least some of our individual retirement funds as separate non-martial property. The question in our minds is how to fund retirement equitably for the spouse who has a lower income or may stop working for some period voluntarily (e.g. to help raise children) or involuntarily (e.g. they were laid off).
Out attorneys have proposed a system where each indvidual can fund their separate retirement up to a certain percentage of their gross income. Any funding of retirement beyond that percentage becomes marital or joint funds. This seems problematic too us from a number of perspectives.
Using a fixed percentage may make it difficult to maximize retirement benefits and doesn't really incorporate changes in income with time. Also either keeping track of what is separate versus marital if they are in the same accounts with multiple investment vehicles/funds seems really complicated and a hassle. If the separate and marital retirement funds are kept totally separate this also seems problematic as now almost double the number of funds need to be managed and the benefits of scale are lost (e.g. Vanguard Admiral versus non-Admiral funds).
Any suggestions on how to handle retirement funds in a prenup that is simple to manage? Especially in a way that keeps some retirement funds separate?
How did you and your spouse structure retirement funds in your prenup?
You are not my lawyer/attorney and I am not considering this legal advice just suggestions on how things might be structured.
Maybe this is too simplistic, but I'd suggest that the prenup state that all retirement accounts are to be held separately and then if one person is unemployed for a length of time then the spouse could choose to contribute to the unemployed person's account during that time. I don't feel that allowances should be made in regards to differences in income, but if you wanted to do it that way you could. So if Spouse A regularly contributes $1000/mo. towards retirement, but that amount isn't feasible for Spouse B, who can only contribute $500/mo., Then Spouse A can choose to contribute $500/mo. towards Spouse B's account with the understanding that the funds would then be owned entirely by Spouse B.
posted by mezzanayne at 8:15 AM on December 15, 2019
posted by mezzanayne at 8:15 AM on December 15, 2019
My wife and I are keeping our retirement accounts separate. At the moment, we are both employed, and of course we intend the eventual payouts to become our joint property.
You do raise good points about possible future changes, such as taking time off work to take care of the kids. We would re-evaluate then.
If you are planning to fund each others' retirement accounts, as some are suggesting here, ask your attorneys or a financial planner about that first. At least for 401k's, my understanding is that this counts as a withdrawal, with whatever that would cost. But there might be tax-efficient ways to structure that transaction.
posted by meaty shoe puppet at 9:43 AM on December 15, 2019 [1 favorite]
You do raise good points about possible future changes, such as taking time off work to take care of the kids. We would re-evaluate then.
If you are planning to fund each others' retirement accounts, as some are suggesting here, ask your attorneys or a financial planner about that first. At least for 401k's, my understanding is that this counts as a withdrawal, with whatever that would cost. But there might be tax-efficient ways to structure that transaction.
posted by meaty shoe puppet at 9:43 AM on December 15, 2019 [1 favorite]
At least for 401k's, my understanding is that this counts as a withdrawal
That would be the case if you withdrew from one spouse's account in order to deposit into the other's. But not if one spouse simply wrote a check to the other and that money were deposited into their IRA, or compensated them for some of their payroll deductions into a 401(k).
posted by beagle at 9:46 AM on December 15, 2019
That would be the case if you withdrew from one spouse's account in order to deposit into the other's. But not if one spouse simply wrote a check to the other and that money were deposited into their IRA, or compensated them for some of their payroll deductions into a 401(k).
posted by beagle at 9:46 AM on December 15, 2019
There are potential problems with some of what is said above. "Tacking a postnup onto a prenup" can work in some states but not in all. Having one spouse contribute to the retirement plan of the other who is unemployed (1) cannot be done directly, (2) cannot be done to a 401(k) for the other spouse's former employment and (3) is limited to the actual earned income of the other spouse in any given year.
posted by megatherium at 10:35 AM on December 15, 2019 [1 favorite]
posted by megatherium at 10:35 AM on December 15, 2019 [1 favorite]
Unless you have large assets previous to marriage or else children from a previous marriage, I don't see why you aren't splitting everything 50/50. How could you possibly consider it fair if one spouse stays home with children and the other keeps retirement account to themselves because they have more income?
I would help if you could clarify your goals here. Are you trying to keep pre-marriage assets separate? That is fairly common if a second marriage, especially with other children involved.
Or are you trying to keep your ongoing marriage assets separate? That would be very unusual and in some states not allowed.
posted by JackFlash at 10:43 AM on December 15, 2019 [6 favorites]
I would help if you could clarify your goals here. Are you trying to keep pre-marriage assets separate? That is fairly common if a second marriage, especially with other children involved.
Or are you trying to keep your ongoing marriage assets separate? That would be very unusual and in some states not allowed.
posted by JackFlash at 10:43 AM on December 15, 2019 [6 favorites]
Our pre-nup made our retirement accounts marital. But at a minimum, I would find it unacceptable to keep post-marriage growth of the accounts separate property.
The way to handle this is to specify that the pre-marriage balance of each remains separate, but any contributions or growth afterward is shared property. That way a child-raising partner gets an equal share of any retirement savings earned by the partner taking on the income-earning during that time.
posted by amaire at 11:54 AM on December 15, 2019 [4 favorites]
The way to handle this is to specify that the pre-marriage balance of each remains separate, but any contributions or growth afterward is shared property. That way a child-raising partner gets an equal share of any retirement savings earned by the partner taking on the income-earning during that time.
posted by amaire at 11:54 AM on December 15, 2019 [4 favorites]
In our prenup, we designated that retirement accounts are to be individual (non-marital/joint) property. We did include a provision for future joint accounts (retirement or otherwise) and agreed to a proportional allocation of any contributions (and earnings) to such accounts.
We didn't address contributions into individual/non-marital retirement accounts because it isn't possible/reasonable to try to plan every eventuality. We both save enough that short spates of involuntary unemployment (i.e., following a layoff) wouldn't derail our retirement plans at all. If one of us were considering voluntary unemployment or reduced employment (i.e., for child or eldercare) we would decide at that time if it makes sense for the other spouse to fund both retirement accounts during that time.
Prenups are great and I'm glad we have one. But don't use one to pre-litigate every possibility; your future spouse should be someone you can discuss specifics with as they arise.
posted by shb at 11:56 AM on December 15, 2019
We didn't address contributions into individual/non-marital retirement accounts because it isn't possible/reasonable to try to plan every eventuality. We both save enough that short spates of involuntary unemployment (i.e., following a layoff) wouldn't derail our retirement plans at all. If one of us were considering voluntary unemployment or reduced employment (i.e., for child or eldercare) we would decide at that time if it makes sense for the other spouse to fund both retirement accounts during that time.
Prenups are great and I'm glad we have one. But don't use one to pre-litigate every possibility; your future spouse should be someone you can discuss specifics with as they arise.
posted by shb at 11:56 AM on December 15, 2019
I would keep retirement accounts separate from marital property. Moving forward in the marriage, I would suggest that you contribute equally to each retirement account from combined resources based on whatever percentage breakdowns make sense to you, and if one spouse can't contribute to a retirement account because they aren't working or don't make enough to fund their account up to the total of the other, I would suggest putting the money that would have gone into a retirement account into an investment account that is also held separate of marital property.
posted by willnot at 12:41 PM on December 15, 2019
posted by willnot at 12:41 PM on December 15, 2019
I'll take a crack it, assuming you want to keep credit for pre-marriage assets separately but that after marriage, everything is joint -- income, spending, retirement accounts and debts.
So pre-marriage you each total up your net assets. Let's say you have $100,000 of savings and $10,000 of school debt for a net of plus $90,000. Let's say your spouse has $10,000 of savings and $70,000 in school debt for a net of minus $60,000. So if you combine them, your spouse owes you $90,000 plus $60,000 for a total owed you of $150,000.
So as part of the pre-nup, your spouse effectively writes you an IOU for $150,000. With that IOU in your pocket, you are now completely equal coming into the marriage. As part of your pre-nup you each are entitled to half of all assets and you each are obligated for half of all debts.
In case of divorce, you total up all you assets and debts and split them in half. Out of your spouse's share, they give you $150,000 to pay off the IOU.
This makes everything simple during the marriage. All income, spending, saving, retirement account and debts are treated as one. You don't have to worry about separate IRAs or 401Ks because no matter which ones you save into, you split them evenly at divorce. Likewise you don't have to worry about savings versus paying off either student loan, because you split them evenly in divorce.
This all assumes that you combine your incomes and spending after marriage. Otherwise I don't know how you make it work if you do not treat each other as equal contributors to the marriage, regardless of income.
posted by JackFlash at 1:10 PM on December 15, 2019 [1 favorite]
So pre-marriage you each total up your net assets. Let's say you have $100,000 of savings and $10,000 of school debt for a net of plus $90,000. Let's say your spouse has $10,000 of savings and $70,000 in school debt for a net of minus $60,000. So if you combine them, your spouse owes you $90,000 plus $60,000 for a total owed you of $150,000.
So as part of the pre-nup, your spouse effectively writes you an IOU for $150,000. With that IOU in your pocket, you are now completely equal coming into the marriage. As part of your pre-nup you each are entitled to half of all assets and you each are obligated for half of all debts.
In case of divorce, you total up all you assets and debts and split them in half. Out of your spouse's share, they give you $150,000 to pay off the IOU.
This makes everything simple during the marriage. All income, spending, saving, retirement account and debts are treated as one. You don't have to worry about separate IRAs or 401Ks because no matter which ones you save into, you split them evenly at divorce. Likewise you don't have to worry about savings versus paying off either student loan, because you split them evenly in divorce.
This all assumes that you combine your incomes and spending after marriage. Otherwise I don't know how you make it work if you do not treat each other as equal contributors to the marriage, regardless of income.
posted by JackFlash at 1:10 PM on December 15, 2019 [1 favorite]
Check with a lawyer in your state but in Ohio, whatever was yours before the marriage will remain yours at the end of the marriage without a prenuptial agreement. The key is to keep good records of your assets before the marriage and your post-ceremony contributions to the assets during the marriage. An asset is just about anything that you vaule such as savings, mutual funds, a house, a '65 Mustang, or grandpa's antique art deco waterfall highboy dresser. Term to reseach is pre-marital assets.
Option No. 1 without an agreement: You owned mutal funds/assets A, B and C before the marriage. The day after the wedding ceremony, don't contribute to them any more but keep them open. Save their annual statements forever to show your contributions and their value the day before the ceremony. The day after the wedding ceremony, open assets D, E and F with new money (don't use money from mutual funds A, B and C. If you don't have enough, don't use before-the-ceremony money.). New money/post-wedding-ceremony money comes from your salary or some other post-ceremony asset. Following the ceremony, your spouse can contribute to assets D, E and F but not to assets A, B and C.
Option No. 2 without an agreement: You owned mutual funds A, B and C before the ceremony. Keep the last before-the-ceremony annual statement forever to show its before-the-ceremony value. Continue contributing to mutual funds A, B and C but keep each annual statement forever to show your post-ceremony contributions. Comparing the before-the-ceremony value and the post-ceremony contributions and their value, only the post-ceremony contributions and their value will be considered a marital asset. Following the ceremony, your spouse can contribute to assets A, B and C.
An option to store the assets A, B and C's annual statements is on your Google Drive, Dropbox or iCloud.
posted by dlwr300 at 6:38 AM on December 16, 2019
Option No. 1 without an agreement: You owned mutal funds/assets A, B and C before the marriage. The day after the wedding ceremony, don't contribute to them any more but keep them open. Save their annual statements forever to show your contributions and their value the day before the ceremony. The day after the wedding ceremony, open assets D, E and F with new money (don't use money from mutual funds A, B and C. If you don't have enough, don't use before-the-ceremony money.). New money/post-wedding-ceremony money comes from your salary or some other post-ceremony asset. Following the ceremony, your spouse can contribute to assets D, E and F but not to assets A, B and C.
Option No. 2 without an agreement: You owned mutual funds A, B and C before the ceremony. Keep the last before-the-ceremony annual statement forever to show its before-the-ceremony value. Continue contributing to mutual funds A, B and C but keep each annual statement forever to show your post-ceremony contributions. Comparing the before-the-ceremony value and the post-ceremony contributions and their value, only the post-ceremony contributions and their value will be considered a marital asset. Following the ceremony, your spouse can contribute to assets A, B and C.
An option to store the assets A, B and C's annual statements is on your Google Drive, Dropbox or iCloud.
posted by dlwr300 at 6:38 AM on December 16, 2019
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posted by beagle at 7:52 AM on December 15, 2019 [2 favorites]