One of the most important and valuable assets to divide in a divorce is the retirement funds owned separately or jointly by the spouse. Often in a marriage, only one spouse has generated the income to drive the investment account, and the other spouse needs a share of that account to have the ability to survive the golden years.
Investment accounts come in two categories; work-related and non-work-related.
The work-related accounts usually involve either a pension or an IRA where the employer makes matching contributions. Most pensions have a marital component to them, i.e., they accrued value during the marriage. That marital component is usually divisible under a federal law known as ERISA. However, some pensions are excluded by law – notably, pensions for public school teachers. You will need to check with your attorney to see if your spouse has a pension that could be non-divisible.
The non-work-related pensions are either IRAs or investment accounts like mutual funds. Again, even if in the name of one spouse, the contributions made during the marriage are marital property subject to division.
Identifying the existence of the investment accounts is the easy part; dividing out the shares can be tricky. Why?
Most retirement accounts do not vest until the holder reaches retirement; consequently, one cannot identify with precision the exact dollar value of the marital portion at the time of divorce because we cannot predict the future. Instead, we can assign to a spouse a percentage of the account as of the date of dissolution. That amount can be allocated to a separate fund in the name of the other spouse, and all without any early withdrawal penalties or taxes.
In order to allocate a part of a pension or other retirement account or an investment fund, the parties will need to use a Qualified Domestic Relations Order, or QDRO.
Unfortunately, we do not have a uniform QDRO that covers every retirement and investment plan. Instead, we have a whole variety of plans that vary based on the requirements of the plan administrator. You will need an attorney who has experience drafting QDROs to make sure yours will be accepted by the plan administrator; if not, it will need to be rewritten, and this can cause potential problems as well as additional expense.
Once an accepted QDRO is signed by the court, the spouse now has a defined share in that retirement or investment account. The spouse could borrow against it or even withdraw the funds if allowed, but the latter option will result in penalties and taxes. The best part about the QDRO is that it allows the share to continue to grow as it had been for the time during the marriage, and the spouse can add funds to it as well as the plan allows.
Remember, retirement accounts and investment accounts may prove the most important assets to divide in a marriage, but also the trickiest.
If you have questions about dividing retirement and pension accounts in a divorce, contact us – we can help.