Your Nest Egg: Retirement Plans and Divorce

A retirement plan may be the most valuable asset any couple owns.  Pensions are essentially promises to pay the employee when the time arrives, based 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.  These accounts are intended to be used for income upon retirement, and there are severe tax penalties if you use or withdraw funds if you are under the age of 59 and ½, on top of the funds being considered income.

When a couple separates, they may choose to enter into a contract called a separation agreement, which resolves all of the marital property issues.  On the other hand, you or your spouse may file a lawsuit called equitable distribution and ask the court to make the decisions about who keeps what.  Yet another way to finalize the property is through mediation of some other type of alternative dispute resolution.

An account 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.  The court will also rule on the plan value for funds earned before the marriage, if any, and the vale 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 companies managing the plan change several times over the years.

When a retirement benefit 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, there is no taxable event when a retirement is divided.  It stays there until the effective date for payment, and you and your spouse will each claim only the amount paid to you for tax purposes.   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.

Print This Post