How Divorce Impacts Retirement
You’ve worked hard to plan for retirement. However, now that you are divorcing, your retirement funds may be marital property. You’ll need to divide retirement assets as part of the equitable distribution process.
Key Takeaways
Distribution of Retirement Benefits
A few of the most common benefits likely to be distributed are:
401(k) and 403(b)
A retirement plan can be an IRA or a qualified plan. These types have rules attached to them. For an IRA, a transfer incident to divorce can be made. Qualified plans, such as 401(k) and 403(b), are divided under the Qualified Domestic Relations Order (QDRO). When filing submissions to the court, each retirement asset should belong to the right category, so they are classified and listed correctly in the divorce or settlement agreement.
IRAs
In an IRA transfer incident to divorce, the IRA custodian will depend on the circumstances of the division of assets and the decree to classify the split as a transfer or a rollover. When the transfer is complete, the recipient becomes the legal owner of the asset and will pay all taxes on all future transactions and distributions concerning the asset. Transferred incidents to divorce are non-taxable.
Other Retirement Benefits
These retirement benefits are most likely marital property during divorce:
- Military pensions
- Veteran’s educational benefits
- ERISA funds
- Keogh plans
- Employee Stock Option Plans (ESOPS)
- Railroad retirement benefits
- Social Security payments
- Compensation for military injuries
- Worker’s compensation disability awards
Divorcing spouses must divide marital assets equitably. However, equitably does not mean equally. The courts take many factors into account when dividing marital assets, including:
- The length of marriage,
- Earning potential of each spouse,
- Disparity between the current earnings of each spouse,
- Availability of other assets,
- Child custody, and
- Tax implications.
With the help of a divorce lawyer and the willingness to negotiate, spouses can come up with a durable plan to divide their assets.
How to Divide Retirement Assets
There are two options for dividing retirement benefits:
- Present-day valuation buy-out. The spouse who does not own the retirement benefits trades the present-day value of his or her interest in the retirement benefit for an asset of equal value, such as cash or property.
- Two accounts. The spouses split the retirement accounts in two using a qualified domestic relations order (QDRO). A QDRO is a legal order that is part of a divorce agreement. It splits or changes ownership of a retirement fund or pension plan to equitably divide assets during a divorce. It can also protect any tax benefits. It is like a transfer incident to divorce in that it is also not taxed with the condition that they are reported accurately to courts and plan custodians. Assets using QDRO can be classed as or rolled into a qualified plan or a Roth/traditional IRA. Transfers from qualified plans before divorce settlements that the IRS does not consider as QDRO are taxable and under penalty.
In order to determine the right choice for you, you will need to know the present and future value of your retirement accounts. The marital value of accounts such as IRAs and 401(k)s can be calculated. However, dividing other retirement assets like a pension can be very complicated. A professional pension analyst must often calculate the marital portion of a pension. The analyst will then determine the pension’s current monthly payout amount. An advance agreement can then explain how the spouses will split the amount. You may also need a professional’s input for the division of stock options.
Get Help
If you’re concerned about the fate of your retirement accounts after divorce, we can help. Schedule your consultation today so we can get started.