Depending on the state you live in, retirement funds are divided along with the rest of the martial property.. This article will review the different types of retirement accounts, the different ways to divide the retirement accounts (do I need a QDRO?), the potential tax consequences, and how that affects the division of marital property during a divorce.
Determining the Value of Your Assets
During your divorce proceedings, your attorney will request that you provide documents that show what assets you and your spouse own or acquired during the marriage. Usually, the two most considerable assets include your home and retirement accounts. To determine the value of your retirement accounts, it is essential to share with your attorney the “history” of those accounts. Property acquired during your marriage is deemed “marital” property. But what if your retirement account was started before your marriage? All funds deposited into your retirement account during the marriage will be included in your marital estate. You may need to seek the advice of an actuary to value that part of the retirement account that is non-marital.
It is essential to know what you have and its value and how any division of that fund will affect its value after your divorce. There are three “types” of retirement accounts but many “kinds of names” for retirement funds. The three “types” of retirement accounts are (a) accounts where the balance is reflected on the statement; an example being a 401(k) or IRA; (b) a defined contribution plan, or (c) a defined benefit plan; both of which the value is not reflected or ascertainable without review by an actuary or other professional. The many kinds of retirement plans are listed below and found on the IRS website.
The IRS Website Lists the Following “Types” Of Retirement Plans:
- individual retirement plan IIRA)
- Roth IRA
- 401(k) plan
- 403(b) plan
- simple IRA plans (Savings Incentive Match Plans for Employees)
- SEP Plans – simplified employee pension
- SARSEP - salary reduction simplified employee pension
- payroll deduction IRA
- Profit-sharing plans
- defined benefit plan
- Money purchase plans
- employee stock ownership plans (ESOPs)
- governmental plans
- 457 plans
Depending upon the plan you have in place, it will determine how to value and divide it equitably. Most plans are governed by the Employer Retirement Income Security Act (ERISA). Still, others like military and government pensions are not. If a plan is a basic, cash account like a 401(k), the value is easily ascertained and is, therefore, easier to divide. However, do not forget that any “transfer” of assets may cause a tax event. If pension or retirement benefits are rolled into other qualifying plans, no tax would be assessed for the transfer.
If a pension fund cannot be divided amongst the parties, then a qualified domestic relations order (QDRO) will need to be prepared and entered by the Court. This document or Order is prepared with the assistance of the plan administrator for the pension plan you or your spouse own.
Generally, the QDRO will direct the plan administrator to divide the pension between the former spouses when the benefits are paid out. The Order assures the non-participant spouse that in the future when their spouse retires, they will receive their portion of the benefit according to their divorce decree or judgment.
Two Ways To Divide Assets Through A Qualified Domestic Relations Order (Qdro)
- Removal of the non-participants’ portions and transfer to a similar qualified retirement account; or
- Divorcing spouses to share in the payment of benefits when they are paid out.
Before dividing your retirement funds, you should talk to your financial advisor or accountant. When determining the best time to receive your retirement fund, there are many factors to consider. Be sure that you understand the tax consequences of the transferor payout.
Tax Consequences of Dividing Retirement Accounts in Divorce?
Be very careful and mindful of the language used in your divorce documents. Always refer to the exchange or transfer of assets with “transfer incident to divorce” or “rollover to same or similar retirement fund.” There are exceptions to tax penalties that divorcing parties can use to their benefit. If properly transferred, divorcing spouses can avoid the taxes others pay for the transfer or withdrawal of retirement funds.
For the money to be split between the spouses without a penalty or tax assessed against the funds, the agreement should specify a percentage. The dollar amount of the account owner’s balance should go into a spouse’s similar account trustee-to-trustee transfer.
Suppose you withdraw the funds yourself to give to your spouse without transferring them to a similar retirement account. In that case, you may owe not only a 10% penalty on the early withdrawal (if younger than 59) but also the income tax assessed against the funds.
This article provided an overview of retirement funds in a divorce. Hopefully, this article has helped you to understand more the nuisance of how your rights in a divorce apply. Contact one of our experienced divorce lawyers at (630) 324-6666 to help you through the situation.
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