Retirement benefits are often the most valuable asset a couple owns. Pensions are essentially promises to pay the employee when the time arrives, based on a formula calculated on the years of employment and other factors. A defined contribution plan, like an IRA or 401(k), is an actual account containing various investments. It has an exact value at any given time. Retirement is intended to be used for income upon retirement, and there are severe tax penalties if you use or withdraw funds if you have not reached a certain age, on top of the funds being considered income.
Who Decides The Amount Each of Us Gets?
When a couple separates, they may choose to enter into a contract called a separation agreement, which usually resolves all of the marital property issues. Yet another way to finalize the property is through mediation or some other type of alternative dispute resolution. You or your spouse may file a lawsuit for equitable distribution and ask the court to make the decisions about who keeps what.
The Nuts & Bolts
In North Carolina, as part of the claim for division of marital property (called equitable distribution), the retirement must be classified, meaning it will be considered marital, separate or mixed (part separate and part marital) property. Next, a value must be agreed upon or ruled upon by the court. CPAs or other financial professionals will give expert opinions when disputed, such as the exact value of a pension plan when the person has not yet retired. The court will also rule on the plan value for funds earned before the marriage, if any, and the value based on any funds contributed after the separation. Matters become more complicated if there are required minimum distributions (RMDs) based on age after the separation, withdrawals after separation (thereby reducing the overall value), roll-overs or multiple companies managing the plan if the company has changed or been merged with other companies over the years.
How Are the Benefits Actually Divided?
When a pension must be divided, there is typically a court order directing the plan administrator to send two checks each month when the benefits are paid, one to you and one to your former spouse. This order is called a QDRO (qualified domestic relations order), or sometimes just a DRO, depending on whether the account is subject to a federal law called ERISA. For military accounts, a MPDO (military pension division order) is the type of court order that accomplishes a division of benefits. Done properly by your attorney, the division of benefits does not create a taxable event. Some retirement benefits, IRAs for example, are divided by a roll-over transferring a portion of the account to the other person’s account and the process is completed. Another consideration to take into account is how death benefits are assigned, and who any beneficiaries will be. If there are any outstanding loans against the account, the court or the parties must determine how that debt will be treated.