Splitting Retirement Accounts

Splitting Retirement Accounts

In a recent case, a couple, age 39 and 35, who had divorced four years ago, hired me to help them split their respective retirement accounts. This couple of relative humble means, had made the decision when they ended their marriage after 11 years, to leave the retirement money out of the discussion. At the time when they were negotiating terms, the couple were under the belief that the money would grow into a larger sum of money if they just left the accounts alone until the time when they retired in their sixties. Their goal was to split the money at that time so that they would have more money in retirement.

When we reviewed their respective accounts, we found the following:

  1. The lady, who now had remarried, named her new husband as beneficiary on her RRSP.
  2. The man, who had not remarried, had named the children as beneficiaries on his RRSP’s.
  3. The two investment accounts were with different advisors at two different firms. The lady’s investment account was conservatively invested over the years and had enjoyed a Rate of Return of 7.4% over the 15 years. The man’s RRSP was aggressively invested in a higher risk portfolio and achieved a Rate of Return of 9.7% over the same period of time.
  4. They were both contributing to their RRSP’s. She had contributed $300.00 per month since the divorce. He, on the other hand, put in varying amounts each year, usually in February, also since the divorce.

The couple, wishing to facilitate an amicable divorce, inadvertently created six big problems for themselves. These problems were:

  1.  The retirement fund agreement that they had made was made as a part of their respective wills, but with no formulas as to how the money was to be shared with each other at an unspecified retirement time.
  2. If either one died or became incapacitated, the beneficiary designation on their RRSP’s would conflict with their respective wills.
  3. At time of co-habitation, he had just over $16,000 in his RRSP and she had none. Therefore, this amount would be exempt from the divorce calculations.
  4. The RRSPs are not invested in the same way, resulting in different future values.
  5. The amount of money that each person is investing into their RRSPs is not the same, also resulting in different future values.
  6. The man is now seeing a new lady who will expect that she will become the beneficiary of his RRSP.

Luckily, they decided to review their verbal agreement with me to see if they should make things smarter. Fortunately, we were able to review this noble but messy arrangement after only 4 years.

Here is what we did:

  1.  We figured out the value of the man’s RRSP at time of co-habitation.
  2. We calculated the value of the man’s RRSP from date of co-habitation to the date of divorce.
  3. We subtracted the amount of money he had when they got together from the amount of money in the account on divorce date. We divided those sum by 50% as that is the amount of money she is entitled to according to the Marriage Act.
  4. We calculated the amount of money she accumulated within her RRSP up to the date of divorce. We divided those sum by 50% as that is the amount of money he is entitled to according to the Marriage Act.
  5. Then we calculated the rate of growth of the principle sums, since the divorce up to the present date. We kept the contribution amounts out of this calculation because what they each contributed to their RRSP’s belongs to them personally. The amount of money calculated would then be added to the sum calculated in points 3 and 4.
  6. I advised them to see their respective advisors, with copies of our calculations and their Divorce Agreement so that the applicable transfer forms could transfer the money without triggering taxation.

This collaborative process was completed over four one-hour meetings. The couples motivation to work out the arrangement with me, a financial neutral was three fold: 1) they wanted to maintain the amicable relationship, they had built up since the divorce, 2) to show their children that their imperfect parents could still respect each other and 3) to work out an arrangement that met each others needs, without breaking the bank. 

In conclusion, I did advise them to seek thirdparty advice to determine if we missed anything. They ultimately were satisfied as they got much closer to the arrangement they wanted when they got divorced 4 years earlier.