Retirement accounts are often one of the most valuable marital assets to be divided in a divorce. Regardless of whose name is on the account, retirement funds that accrued during the marriage may be divided in a divorce
“Retirement accounts” encompass a variety of accounts – individual retirement accounts (IRAs), 401(k) plans, 403(b) plans, Railroad Retirement Board Annuities, Thrift Savings Plans, Military Retired Pay or Pensions. They can be provided through your (or your spouse’s) current place of employment, former employment, or individually obtained. They can be vested or unvested. These assets will be accounted for when inventorying your marital estate.
If your decree orders that a retirement account be divided, a separate court order will need to be prepared for that division to take place. Many retirement and pension plans are split through a qualified domestic relations order (QDRO). Federal retirement plans are divided through a court order acceptable for processing (COAP). These orders help ensure that a nonemployee spouse receives his or her share directly from the employee-spouse’s plan.
Obtaining a QDRO or COAP is a critical step in the divorce process. They can be complex documents, and a number of steps are required to reduce future concerns about enforcement. Additionally, there are a number of technical rules that must be included in these orders, which must be approved by the plan administrator in order to be valid.
If you contributed to a retirement plan before your marriage, the court will most likely award your spouse only a portion of what was acquired during the marriage. It is essential to provide documentation showing the account balance before the date of marriage in order to treat that portion as pre-marital. Likewise, if you continue contributing to the same retirement account after your divorce, your spouse will still only be entitled to that portion accumulated during your marriage.
While you may have retirement accounts in your marital estate, it is not required that every account be split. For example, if you and your spouse both have retirement accounts of comparable value, it is acceptable for your decree to state that you will each keep your own. Similarly, if you wish to keep your entire retirement plan, you may offer to offset the value by agreeing to give your spouse a different asset of like value.
Important tip: Be aware that your lawyer spouse may argue to “tax affect” the retirement accounts. If the type of account is one that has pre-tax monies in it, and you were to withdraw the funds, those monies would be taxed. In other words, if you have a retirement account with $100,000 in it and you withdraw those funds, you would not receive the entire $100,000. If you fall within the 25% tax bracket, you would receive $75,000. Tax-affecting this retirement account alters the value from $100,000 to $75,000, which may affect the overall distribution of your marital estate.
