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How Divorcees Divide Retirement Accounts and Pensions

Updated on June 1st, 2022
Divide Retirement Accounts

Most divorces require dividing retirement money or pensions and a family home. Let’s understand how we can break up the understanding of retirement accounts. Remember that all states treat divisions of assets differently — so be sure to check with your individual state’s laws.

The laws that apply in certain situations can help you with more confidence and understanding when you need it most. For example, the law provides for fair distribution of retirement funds in divorce situations since these funds are marital (or communal) assets. The concept seems straightforward enough — but there are various regulations, laws, and processes to follow.

How are Pensions handled in Divorce?

IRAs

The essential factors in the distribution of funds include when the asset began accruing, what form of retirement asset it is, and the marital cut-off date?

There are two kinds of plans for retirement

A defined-contribution plan is a savings plan. The employee, employer, or both contribute to a retirement account in the employee’s name. Examples of defined contribution plans are 403(b), 457(b), IRA, Profit Sharing Plan, etc.

A defined benefit plan is a pension that provides a benefit based on an employee’s years of service and salary history. When an employee retires, a defined benefit plan pays monthly. The payment is in addition to the employee’s lifetime compensation.

To split a retirement asset — the account must first be valued.

There are many ways to achieve this. The value depends on the asset (defined contribution or defined benefit plan) and the state valuation regulations.

First, the law agrees upon the value of the asset. Next, The court uses that figure to determine each spouse’s income. In states with communal property, it’s 50/50. In states with equal distribution, the amount might vary.

Also, exchanging one asset for another may negotiate a different distribution than 50/50. This reasoning avoids disaster.

A divorced spouse may want to keep the family home. That spouse may be ready to give up a more significant percentage of any retirement assets.

Firstly, a divorce ruling specifies how each spouse will share retirement assets. Secondly, a Qualified Domestic Relations Order (QDRO) is usually required. This court order instructs a retirement administrator to divide an asset into two accounts. QDROs only cover IRS-qualified plans protected by the ERISA (ERISA).

However, separate Domestic Relations Orders (COAP) are necessary for the government and military pensions. A QDRO is not required to separate Individual Retirement Accounts (IRAs). Section 408 of the IRS governs IRAs. Banks and financial institutions must use a divorce or separation agreement to transfer an IRA from one spouse to the other.

After the plan accepts the QDRO, the defined contribution asset is split into two accounts. The bank then transfers to the opposite party. A defined benefit plan will create a separate interest for the former spouse and provide a lifetime benefit to each partner.

Who Divides the Pension Plans?

Many parties will be involved in sharing retirement assets. A retirement asset must be disclosed as an asset in a divorce by your spouse. You must mention this asset in any disclosures if you are not working with an attorney. Lawyers work with each spouse to settle the asset and its subsequent distribution.

If the group reaches no agreement, a court will analyze the facts. Then, the court will assess how it fits into an overall asset distribution plan, and issue a legally enforceable judgment. After the divorce is final, the court will tell account custodians to split the money according to the judgment.

How to Divide Accounts?

Dividing Pensions

To split a retirement account, you must first determine its value. This is simple for a defined contribution plan. Next, it is the balance in an account at a specific date.

The law calculates your monthly benefit based on your income and years of service in a defined benefit plan.

After determining the value, there are two ways to split an account. The Immediate Offset Method compares the retirement account’s actuarial present value against other marital assets. The lawyer and the spouses may compare a large retirement account to the net worth of the family home.

Depending on each partner’s financial intentions, the spouse who earned the retirement account may keep it. In contrast, the other spouse receives a more significant portion of the marital asset in return for giving up the interest. As a result, the value of the property may offset the retirement account value.

The Deferred Distribution Method divides a retirement account.

The law requires splitting the benefits after paying out under the retirement plan. Execution of a (Q)DRO decides how much each spouse will receive when benefits become available. The retirement account proceeds the couple share are solely those within the marriage.

Consequently, a spouse contributing to pension funds after a divorce is typically separate property and stay with the employee/contributory spouse.

When does Court Determine the Account Value?

The value of retirement accounts varies by state. Each state generally accepts that monies contributed during a marriage as marital property. However, earnings made during that period are also marital assets and are subject to distribution. That is to say, depending on state rules.

The valuation date is when a law representative gives the retirement account value. However, if you already have money in a retirement plan as a couple, consider another idea. The court usually sees those monies as separate property.

They are not subject to fair distribution or community property rules. But the burden of evidence rests exclusively with the claimant. For example, the valuation date might be the date of a divorce trial or filing a divorce lawsuit.

Funds that you contribute after your separation date are usually separate. Depending on state law, the funds are not susceptible to designation as marital assets the two spouses share. But, again, the standards differ by state, so you should consult an attorney to be sure.

Deanna Ritchie

Deanna Ritchie

Deanna Ritchie is a financial editor at Due. She has a degree in English Literature. She has written 1000+ articles on getting out of debt and mastering your finances. She has edited over 40,000 articles in her life. She has a passion for helping writers inspire others through their words. Deanna has also been an editor at Entrepreneur Magazine and ReadWrite.

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