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Dividing Retirement Assets in Divorce

A typical question that divorcing couples have regarding property division is “What am I entitled to when it comes to retirement accounts. Retirement accounts could include Individual Retirement Accounts (IRA’s), employer sponsored retirement savings accounts such as a 401(k) or 403(b), or defined benefit pensions which promise an employee a stream of income after retirement.  

In many cases these retirement accounts are the largest assets of the marital estate. Complicated rules concerning division of these accounts, tax consequences, and the varying requirements of individual retirement plans make this area of family law particularly tricky.  It is crucial that you have an experienced divorce attorney to obtain information regarding all of these retirement assets early on and negotiate fair terms of division.  It is also a good idea to have your attorney hire an expert to draft the orders to divide these accounts.

Generally, a spouse will receive half of the marital portion of retirement accounts. For IRAs and retirement savings accounts, this typically means your spouse will receive one half of the increased value from the date of marriage through the date of entry of a judgment of divorce. For a pension, your spouse would typically receive one half of the “accrued benefit” in that plan during the marriage.  For example, if a couple was married for 10 years, and a spouse participated in a pension plan for 20 years at the time of divorce, the other spouse would be entitled to half of the increase in benefits over that 10 years, or 25% of the pension benefit as of the date of divorce.   

If the retirement account is a “qualified plan” under the Internal Revenue Code, it must be divided by entering a Domestic Relations Order (DRO).  Federal law requires that these types of plans from private companies be divided through a Qualified Domestic Relations Order (QDRO) with government sponsored plans being divided through an Eliglible Domestic Relations Order (EDRO).  Basically, the DRO instructs the plan administrator (the spouse’s company) to pay a portion of the plan’s funds to another person (the other spouse). Depending on the type of plan, the non-employee spouse typically cannot start collecting benefits until the employee spouse goes into pay status.

Not all plans are qualified plans, however, and they may or may not be divisible. Plans like a traditional, Roth, or SEP IRA are not qualified plans. This means that they are divisible without having to draft a separate court order.  It is still important that your attorney understand the tax implications of these types of accounts and how to transfer them to you or your spouse after the divorce.

There are many important issues to consider when it comes to splitting retirement assets. For example, when the parties are negotiating a settlement where one spouse will keep the plan assets and the other will receive an equal substitute, the word “equal” becomes extremely important. If the plan is a tax deferred plan then a dollar-for-dollar trade-off for some other after-tax asset such as a savings account or equity in a home may not be equal. If one spouse will have to pay taxes on the plan’s assets in retirement, it is not “equal” to award the other spouse an equal amount of money out of a bank account because taxes have already been paid on those funds.  Moreover, adjustments need to be made for loans against 401(k) accounts and unvested profit sharing accounts.

Buying out your wife’s interest in a defined benefit pension plan is a risky proposition.  The present day value of that pension is speculative given the uncertainty of life expectancies and the viability of the pension plan itself.  Normally an expert would need to be retained to estimate the value of that pension and even then they are guessing.  Pension values can be quite high and most marital estates don’t have enough other liquid assets to make that trade off.

These are just a few issues that can come up when splitting retirement assets in divorce. There are numerous exceptions to the rules and many pitfalls facing divorcing couples. An experienced family law attorney is invaluable to the divorce process, especially when retirement assets are involved.  

About ADAM (American Divorce Association for Men)

The American Divorce Association for Men (ADAM) is a group of highly qualified attorneys  who advocate for men’s rights in divorce, child custody and parenting time, paternity, support, property settlement, post judgment modifications, and other family law matters. Since 1988, ADAM has been aggressive, diligent, and uncompromising when representing their clients. A team of compassionate and skilled family law attorneys, ADAM is dedicated to being Michigan’s leading divorce lawyers for men.

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