Dividing retirement assets
How Are Retirement Plan Assets Divided in a Divorce?
Retirement assets such as IRAs, pension plans, and 401k plans are deferred compensation plans that are divisible as part of a property settlement in divorce.
Because retirement benefits may be part of the division of marital assets regardless of who is named on the plan, it’s essential to know how they are valued and divided. Here’s what you should know about dividing retirement plans in divorce:
Types of Retirement Assets
How retirement assets share will depend on factors such as the type of deferred compensation plan. The following are the two primary forms:
Defined Benefit plans – A defined benefit plan is a company retirement plan such as a pension plan that is based on an employee’s years of service and salary history. At the beginning of retirement age, the employee is provided a monthly benefit with payment continuing for the rest of their life.
Defined Contribution plans – A defined contribution plan’s value is determined by the contribution amounts made into a retirement account, commonly a savings plan such as 401k, IRA, or ESOP.
Methods of Dividing a Retirement Account
Before dividing a retirement account, the present value of the benefits must first be determined. With a defined contribution plan, the present value is the current vested value and will divide the value between the two parties. A professional usually is required to obtain the correct value.
Dividing a defined benefit plan is a little more complicated. There are two different methods of sharing the pension; the present value calculation or the division of future benefit. The division of future benefit approach is also known as the “deferred distribution method;” in this case, the couple shares the future stream of monthly benefits.
With the present value calculation, also known as the “Immediate Offset Method,” the current value of the pension is divided at the time of the divorce. In this scenario, the non-pension holder gives up any rights to future pension payment, and the pension plan holder keeps 100% of all future pension benefits. It is usually the method for couples who do not want to have anything that ties them together, well into their retirement age. However, there are tax implications when dividing a pensions present value.
In a case of division of future benefit, a Qualified Domestic Relations Order (QDRO) is drafted to instruct how the pension plan is paid out to the non-plan-holder spouse.
Qualified Domestic Relations Order (QDRO) Explained
A QDRO is short for Qualified Domestic Relations Order. It can protect your interests in a situation where your spouse is the primary breadwinner, and you need to ensure your share of their retirement account. A QDRO is a court order or judgment that can guarantee you receive the benefits in which you are legally entitled. QDRO is used for private company pensions. A different tyro of order is required for Military pensions. Another order is required for federal civil pensions such as from the Post office. The document is typically written out by a divorce lawyer that specializes in preparing QDROs and other pension orders. It is then signed by a judge, outlining specific instructions to the administrator of the pension how future pension benefits will be divided between the plan holder and ex-spouse and submitted to the retirement plan administrator.
You do not need a QDRO for IRA’s as they can just be divided as necessary.
If you would like to discuss the specifics of your divorce case or need more information about protecting and dividing assets in the divorce, call Debora A. Diaz at 727-846-1802.
Written by: Debora A. Diaz Esquire