When dividing a retirement account in a divorce, whether loans are included or excluded can significantly impact the value of the account being divided and the amount awarded to each spouse. Here’s a breakdown of the key differences:
1. Loans Included:
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Account Value : The total balance of the retirement account includes the outstanding loan amount. This means the loan is treated as part of the account’s value for division purposes.
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Impact on Division : If the loan is included, the spouse receiving a portion of the retirement account (via QDRO or similar mechanism) could be awarded a share of the gross account value , including the loan.
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For example:
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Total account balance = $100,000
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Outstanding loan = $20,000
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Gross value for division = $100,000
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If dividing 50/50, each spouse receives $50,000.
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Who Bears the Loan : Generally, the spouse who took out the loan retains responsibility for repaying it. Thus, the loan effectively reduces that spouse’s remaining share of the account after the division.
2. Loans Excluded:
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Account Value : The outstanding loan amount is deducted from the retirement account balance before division. The net value of the account (after subtracting the loan) is used for division purposes.
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Impact on Division : If the loan is excluded, only the net value of the account is divided.
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For example:
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Total account balance = $100,000
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Outstanding loan = $20,000
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Net value for division = $80,000
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If dividing 50/50, each spouse receives $40,000.
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Who Bears the Loan : Since the loan is excluded, its effect is factored in before the division, reducing the value of the account from which the loan originated.
Practical Impact
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If the Loan is Excluded:
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Effect : The loan reduces the net value of the account before division, and both spouses effectively “share” the burden of the loan equally, as the available pool of funds is smaller.
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Fairness Argument : This approach is fair if the loan was for a marital purpose, as both spouses benefited from it. Each spouse effectively takes a proportional share of the reduced account value (e.g., half of the loan amount through reduced division).
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If the Loan is Included :
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Effect : The gross value of the account is divided, and the borrowing spouse is solely responsible for repaying the loan. This gives the non-borrowing spouse a higher net benefit.
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Fairness Argument : Fairer if the loan was used for non-marital purposes or benefited only the borrowing spouse. This approach could seem unfair if the loan was used for marital purposes, as the borrowing spouse bears the full burden of repayment for something that benefited both spouses.
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Fairness Considerations : Whether loans are included or excluded often comes down to fairness and negotiations, particularly regarding:
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The purpose of the loan (e.g., for marital expenses, one spouse’s personal benefit, etc.).
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Whether the loan was taken before or during divorce proceedings.
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Whether the borrowing spouse will solely repay the loan.
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How Courts Decide :
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Courts often look at how the loan was used. If it was for marital purposes, it might be fairer to exclude the loan, which reduces each spouse’s share by half of the outstanding loan amount. If it was for a spouse’s individual purpose, the court may include the loan and assign responsibility to the borrowing spouse.
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Ultimately, the division depends on the specific facts of the case.
Contact Us
If you are facing a divorce and need assistance with dividing retirement loans, we are here to help. Contact Reardon House Colton PLC at (480) 520-3233 or send us a message to schedule a consultation and discuss your options.
Taylor S. House
Fellow of the American Academy of Matrimonial Lawyers focusing on complex divorce and custody matters, business valuations, and intricate financial issues.
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