How is retirement divided in divorce

Protection from Violence or Abuse. Self Help. Featured Self-Help. Self-Help Guides. Ask a Question. Guided Forms. Informative Articles. More Resources. Court Information. Helpful Non-Legal Organizations. Types of Legal Help. Legal Assistance. Find Help. Legal Help Directory. Courts handle the division of divorcing couples' assets differently in every divorce case.

The end result depends on both the law of the state where the divorce case is pending and, of course, the specific facts of each case. There are two types of property division in divorce, depending on where you live: community property division and equitable distribution. If you live in a "community property" state, the law considers all assets and debts acquired during the marriage as "community property.

This can include contributions to retirement accounts such as k accounts. If you live in a state that uses the "equitable distribution" method of dividing property which is what the majority of states follow , your state's courts will divide property between couples in a way the judge hearing the case believes is equitable or fair, but not necessarily equally.

Equitable distribution states have different rules on dividing property. Courts must first categorize all property as marital joint or separate, and then the judge can divide marital assets equitably.

If the court declares any property as separate, the judge will award the property to the owner spouse and will not divide it in the divorce. Retirement accounts, like k accounts or Individual Retirement Accounts IRAs , are commonly a couple's largest assets. Individuals with k or similar accounts typically fund the account while working throughout the marriage. Your employer may offer a matching contribution, which increases the balance available when you retire. An IRA is like a k in that they both offer valuable tax benefits, but an IRA has a wider variety of investments, usually doesn't have the same fees as a k.

A pension plan is a retirement account that requires an employer to deposit funds into a pool set aside for an employee's future benefit. Many teachers, firefighters, and police unions utilize pension plans. Employees can invest additional income into their pension from their wages, and employers can match the contributions. Like real property, such as a marital home , personal property, and bank accounts, retirement accounts are up for grabs during a divorce. Many spouses would rather hold the reins of a divorce's property division aspect than leave it up to a judge.

And the court allows spouses to dictate the division. This means you can work directly with your spouse to decide who will receive assets, such as a retirement account. If you reach an agreement, you or your attorneys should write it down in a document called a " marital settlement agreement " or "divorce settlement" so there is no dispute later about who agreed to what.

During the divorce negotiation process, spouses often make trade-offs. The assumption is that the employee will be at a lower tax bracket at the time of retirement. The individual always knows how much is in the account and what the retirement is worth. A defined contribution plan that is divided in equitable distribution is distributed to each party via a transfer after a judgment of divorce is entered.

So long as the transfer is into a similar account, the funds will not be taxed. A defined contribution plan is a plan in which the actual amount will not be determined until retirement. The most common defined contribution plan is a pension. The employee contributes towards the pension during employment, and then when the employee retires, a benefit will be paid based on formula the employer uses, typically taking into account the number of years worked, and the final salary at the time of retirement.

Dividing a defined benefit plan is trickier than a defined contribution plan. The value of the benefit can be divided at the time of the divorce, or at the time the employee begins to receive the payments. The valuation is typically done by an actuary or other similar expert.

This is known as a deferred distribution. In order to divide a defined benefit plan after divorce, an order oftentimes known as a Qualified Domestic Relations Order will be signed by the court which directs the administrator of the retirement plan to pay a portion to the former spouse when the employee retires.

The question that has to be asked is what is the appropriate portion. The only part of the benefit that a former spouse will be entitled to in equitable distribution is that portion that was earned during the time the parties were married. Yet the employee may have been working before the marriage, and may continue to work after the marriage is over. In order to get the right amount, a fraction is often used in which the top of the fraction is the part of the employment which occurred during the marriage, and the bottom of the fraction is the entire length of employment.

Another issue that should be addressed when dividing a defined benefit plan is survivor benefits. Most plans provide that the benefit stops on the death of the employee or participant, but may have an option that the employee may choose a survivor benefit which will allow a beneficiary to continue to receive benefits after the death of the participant.

However, if the employee chooses this benefit, the amount of the benefit usually is less. Depending on the circumstances of the case, it is important to consider this issue when dividing a defines benefit plan. Equally important is making sure your legal counsel us familiar with these issues.

Millner concentrates her practice in divorce, custody, adoption, and appeals. Pensions are even more complicated to divvy up. Then you could use a QDRO to split the payments by either a dollar or percentage amount. To divide an IRA between spouses, the terms must be specified in the divorce or legal separation agreement, which the account owner gives to the IRA sponsor.

If possible, use a Roth IRA for a spouse who wants cash. A Roth is more tax efficient because withdrawals are generally tax-free. Skip to header Skip to main content Skip to footer. Home Divorce. Divorce retirement alimony. Most Popular.