Pension Plans: An Important Asset in Your Pennsylvania Divorce
If your spouse’s employer offers a pension plan, you may have been counting on that money to help fund your retirement. Now that you’re getting divorced, you might be worried about how this change will affect your future. Concerns about financial stability can feel especially stressful if you’re over 50 and nearing retirement.
Key Takeaways
Fortunately, pensions are treated like any other marital asset that acquires value during the marriage, meaning they can be divided between spouses. However, the process isn’t automatic, and it’s essential to understand your options.
Determining Whether to Divide a Pension Plan
The first step is deciding whether the pension should be divided at all. If you or your spouse have other retirement accounts, such as IRAs or 401(k)s, it may make more sense to offset the value of the pension with these assets. This approach could save you the cost and complexity of dividing the pension plan.
For example, if the pension is valued at $100,000 and you own an IRA worth a similar amount, you might agree to keep the IRA while your spouse retains the pension. This can simplify the division of assets and avoid the need for additional legal documents. However, if dividing the pension plan is the best option for you, there are specific steps you’ll need to take.
How to Divide a Pension Plan
If you decide to pursue a share of your spouse’s pension plan, you must explicitly request it during your divorce proceedings. It’s important to identify all pension plans that may be subject to division, including traditional pensions and 401(k)s. Each plan requires a separate evaluation and legal process.
Your attorney will work with a pension analyst to determine the marital value of each plan. This involves calculating how much of the pension was earned during the marriage and assigning a fair value to that portion. Based on this analysis, your attorney will estimate your share of the pension and prepare a Qualified Domestic Relations Order (QDRO).
What Is a QDRO?
A QDRO is a court order that allows the division of retirement benefits without penalties for either spouse. It ensures the pension plan administrator is notified of your right to a portion of the pension. The QDRO also specifies tax responsibilities—typically, you’ll be responsible for any taxes owed on your share of the pension when it’s distributed.
Because each pension plan has its own rules and requirements, the QDRO must be carefully drafted to meet the administrator’s guidelines. Mistakes in this document, such as failing to include necessary details, can delay or jeopardize your claim to the pension. This is why it’s crucial to work with an experienced attorney who understands the complexities of retirement asset division.
Tax Considerations and Retirement Planning
When dividing a pension, it’s important to think about the tax implications. Pension distributions are typically taxed as ordinary income, which can reduce the amount you ultimately receive. To minimize the tax burden, consider whether rolling your share into a tax-advantaged account, such as an IRA, is a viable option.
Additionally, if the pension is unvested—meaning your spouse hasn’t yet earned the right to the benefits—you’ll need to plan for how this might affect your long-term financial outlook. Your attorney and financial experts can help ensure that your future is protected.
Practical Tips for Dividing Retirement Assets
To prepare for the division of retirement assets, it’s helpful to:
- Request documentation from the pension plan administrator, such as the summary plan description and benefit statements.
- Work with a financial expert to evaluate the true value of the pension and other retirement accounts.
- Discuss all options with your attorney to determine the best strategy for your financial goals.
Taking these steps early in the process can make a significant difference in ensuring your retirement remains secure.
Protecting Your Financial Future
Retirement is one of the most important considerations in any divorce. Your divorce attorney should work closely with you to inventory marital assets and debts, explore all your options, and negotiate a fair division that safeguards your financial future. To get started, contact Petrelli Previtera, LLC at 866-465-5395.
