Dividing Retirement Accounts in a Divorce

Many spouses think that dividing retirement accounts should be relatively simple and not much different than dividing other marital property – each spouse gets a certain percentage, usually half (50%).  While that seems very logical for a fixed-value asset like a bank account or the equity in a house, that approach does not apply the same way to an asset whose value will change over time, as with a pension benefit. Spouses often underestimate the complexity of dividing pension assets in a divorce. While these assets may provide regular statements, like a bank account or mutual fund, they are not as straightforward as they seem, and they must be handled differently than retirement savings plans, like 401(k) and 403(b) accounts, and regular, non-retirement accounts.

It can be challenging to value pensions, and many require special treatment to comply with regulatory requirements.

What are the most common retirement benefits?

While there are several different types of retirement assets, they generally fall into one of four categories. 

1. Pensions used to be the standard retirement plan, but they have become much less common over the past ten years. Today, pensions are most often provided as an employee benefit to federal, state, or municipal government employees; however, they are still occasionally offered by labor unions and some private-sector employers. Pensions are a type of defined benefit plan. Employers contribute money to a fund and use that fund to pay a guaranteed amount of money to employees when they reach retirement age.

2. Defined contribution plans are typically offered by employers and have replaced traditional pension plans. In a defined contribution plan, an employer may guarantee that they will pay in a certain amount each year or match employee contributions. The employee is responsible for deciding how the contributions should be invested to provide the money they need in retirement. Furthermore, an employee’s defined contribution plan is subject to investment market volatility. The most common defined contribution plans are the 401(k) and 403(b) plans where employees can generally contribute to their defined contribution plans. 

3. If an employer doesn’t offer a pension or defined contribution plan, the employee can open and fund their retirement account (IRA). If an employee leaves an employer with a 401(k) plan, those funds can be rolled over into an IRA (when an employee changes jobs, retires, or gets divorced.

4. The final type of retirement asset to consider is the annuity. Individuals invest in annuities that promise to pay out a regular stream of income in retirement. This operates somewhat similar to a pension plan except that the source of funds comes from the employee rather than the employer.

What are the most challenges in dividing a pension?

As a pension plan is essentially a promise by your former employer or your union to pay money when a certain condition is fulfilled in the future. Be aware that this type of asset can be difficult to value or divide in a divorce. The employee’s spouse may not be fully vested (i.e., they haven’t earned the ability to receive the payments).

What happens if the employee dies before retirement or changes jobs before they are fully vested? How do you properly value the future income in today’s funds? It is important to address all the potential questions with your attorney before signing a settlement agreement or having a trial before the court.

What are the most challenges in dividing a defined contribution plan or IRA?

Defined contribution plans and IRAs are easier to value than a pension plan, but they come with their challenges. As contributions in these plans and accounts are usually contributed without tax and are not taxed as they grow, the government requires them to be taxed as income at distribution, and this should be accounted for in the divorce. For example, if one spouse withdraws funds from an IRA to give to the other spouse, the spouse taking out money will be taxed on that distribution. However, if that same division is handled properly pursuant to a divorce separation agreement and accompanying court order, the division can be accomplished without tax liability. Distribution and division of money contained in IRAs, 401(k)s and 403(b)s must comply with different sets of rules, depending on the type of fund or account.

What about military and civil service plans?

Military and civil service pensions require specialized knowledge and handling in divorce. While these plans often share some aspects in common, they each have distinct features and rules that must be understood and followed for the recipient spouse to receive the benefits assigned to him/her in the divorce. For instance, it is important to know what happens when a military spouse who is receiving retirement pay becomes disabled. 

What is a Qualified Domestic Relations Order (QDRO)?

When dividing many retirement assets in divorce, it is necessary to prepare a Qualified Domestic Relations Order (QDRO). This is a special legal document that gives retirement account plan administrators the authority to pay out funds to someone other than the employee. The QDRO also directs how the funds should be paid out by the plan administrator. Because there are so many different types of retirement assets and accounts, there are a range of different requirements for the documents needed to release the funds. A QDRO is prepared by your attorney and must be approved by the court.

What are the tax consequences?

One common theme running through the division of property in a divorce is taxation (i.e., what are the tax consequences). The tax-deferred nature of many retirement assets is the cause of many of the detailed restrictions on distribution. The IRS wants to ensure that someone pays taxes on the funds that were invested before taxation. You should always discuss the tax burden of receiving a retirement asset at divorce with your attorney. Your attorney should attempt to minimize your tax liability and try to ensure that any remaining tax liability is allocated in a way that protects your interests. An experienced divorce attorney understands the potential tax implications of decisions and knows the best strategies to minimize your tax liability.

Retirement assets often make up the greatest part of a couple’s net worth at the time of divorce. At divorce, it is essential to ensure that pension plans and other retirement assets are properly valued and divided. At The Marks Law Firm, L.L.C., we understand how to navigate the complexities of dividing retirement assets in a divorce, including the potential difficulties involved with various types of retirement assets. To learn more about the ways we can protect your interests in divorce, contact us today for a consultation.


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