Why This One Decision Could Cost You 50% of Your Retirement

In marriage as in all things, it's best to be prepared.

In all the excitement and hustle of planning a wedding, it can sometimes be easy to overlook those important conversations about financial matters that all couples should ideally have before tying the knot. After all, you're not just having an elaborate party, you're building a marriage. You may be thinking that prenuptial (or postnuptial) agreements are just for the fabulously wealthy folks whose divorces splash across the tabloids. But if you're getting hitched and you have a retirement account, such as an IRA or a 401(k) through your employer, one of these agreements could keep you from losing 50% of your retirement savings (among other assets). Here's why.

What are the financial implications of divorce?

No one ever gets married with the intention to divorce, but it's relatively commonplace, and if you have a lot of individual and shared assets, it can get complicated for your finances. If you've got joint bank accounts or own property with a spouse, divorce will involve disentangling everything formerly connected. How this is done (and who gets to keep what) will depend on the laws in your state.

Most states fall under common property law, which means that property or assets (or debt) only belong to the person named on the associated document (like a title or a deed). In the course of divorce proceedings, a judge can reassign property or debt, but most often in these states, original ownership is retained during divorce.

However, nine states fall under community property law, which states that all assets or debts acquired during the marriage are considered joint property and must therefore be split in the event of a divorce. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, you'd likely be looking at an even split for assets and debts, including retirement funds amassed during the marriage.

How are retirement accounts handled in divorce?

Turning to retirement accounts specifically, let's say you live in one of the nine community property states and you're going through a divorce. If you started a 401(k) account with your employer prior to getting married, but have since funded it during your marriage, the money added since you were married is considered marital property and has to be split equitably. Alternatively, if you share other marital assets, you could offer your ex-spouse equivalent value in the form of a house or other property, thereby sparing you the hassle of splitting up your retirement money.

Taxes are a major consideration when dividing up a retirement account during a divorce, as there are tax implications for withdrawing money from them (unless you've got a Roth IRA, which is funded with post-tax dollars). Ultimately, a split with complicated financial implications will be made easier with legal help. However, if you want to entirely avoid the hassles that come along with dividing up assets in retirement accounts during a divorce, it pays to look into a prenuptial or postnuptial agreement.

How can a prenup or postnup help?

First, a few quick definitions. A prenuptial agreement is a contract entered into by two parties before they get married, to lay out in writing how marital assets and property will be split in the event of the marriage ending. A postnuptial agreement serves the same purpose, but is entered into after a couple is already married. Sometimes, a postnuptial agreement is created because a couple simply didn't undertake a prenuptial agreement before the wedding, and sometimes couples create them after one party has come into a new asset, such as a monetary inheritance from a relative.

It isn't just the wealthy who can benefit from these agreements. They can be useful for any couple, as they lay out how property from previous marriages can be passed on to children or other relatives, how each spouse will be protected from the other's debts, and just generally circumvent any possible future arguments over money and asset division in the case of divorce. If you have a valid prenup in place that lays out what will happen to any retirement accounts in the event of a divorce, you can eliminate some headaches (and save your retirement cash).

A Harris Poll conducted earlier this year found that 42% of those surveyed support the use of prenups and 35% of unmarried participants stated that they would likely sign one in the future. Remember, no one can predict the future, and having a set financial plan in the event of a divorce can benefit both partners, as well as their retirement funds.