In many divorces, spouses’ pensions and other retirement accounts will be among the highest-value assets they want to protect during their divorce. From IRAs and 401ks to pension plans, these accounts are often the most valuable assets to be divided in a divorce proceeding.
Pensions and retirement accounts are in many ways treated similarly to other types of assets, including being split into separate property and marital or community property. They are also subject to a number of unique considerations and requirements. As a result, if you are preparing for a divorce in North County, CA and you or your spouse own significant retirement assets, you will want to carefully plan to protect your interest in these assets. A skilled San Diego divorce attorney can help you through the process.
Dividing Retirement Plans in a Divorce
Taking a Distribution
It may be tempting to take a distribution from a retirement account in order to pay expenses that come up through the course of divorce. However, if you are under 59 ½ years old, there will be taxes and tax penalties for taking a distribution, which could be tens or hundreds of thousands of dollars, depending on the distribution. Fortunately, there are other ways to split up retirement assets without suffering these tax consequences.
Transferring to Another Retirement Account
You likely will be able to transfer assets from one retirement account to another, but this process has to be done correctly in order to prevent taxation that may result if your transfer looks too much like an asset distribution. This type of transfer will only work with an IRA (either traditional or Roth), and there must be a divorce decree outlining this process in order for you to be able to successfully avoid extra taxes. Even if you have agreed on the terms, you should avoid making the transfer until the divorce is final. Even with the decree, this still might not be the best way to transfer the assets.
The Qualified Domestic Relations Order (QDRO)
One aspect that makes pensions and certain other retirement accounts unique from other types of community property (assuming they qualify as community property under your personal circumstances), is the involvement of a third-party administrator.
When you own a pension, the plan administrator is under a strict duty to distribute pension payments to you in accordance with the terms of the plan. In order to direct payments to a former spouse, the plan administrator needs what is known as a qualified domestic relations order (QDRO). A QDRO is a special type of court order, and it is required regardless of whether you and your spouse settle your divorce amicably or take your differences to trial.
With certain types of retirement plans, obtaining a QDRO requires “joining” the plan as a party to your divorce. This is a complicated process, and one that requires the help of an experienced divorce attorney. Examples of plans that require this “joinder” in order to obtain a QDRO include:
- State government plans, including California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and University of California Retirement System (UCRS) plans.
- Federal government plans, including Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS), and Foreign Service Pension System (FSPS) plans.
Qualified plans covered by ERISA, including private company pensions, 401ks, deferred compensation plans, employee stock ownership plans (ESOPs), profit-sharing plans, and severance plans do not require “joinder” of the plan, but they still require a QDRO. On the other hand, individual retirement accounts (IRAs) and Roth IRAs can generally be divided without a QDRO (though some other form of court judgment or order will still be required).
Leaving the Retirement Account Alone
The easiest and safest solution might be to just leave the retirement account alone. If you have retirement assets worth $1 million and a house worth about the same, each spouse could take half of the total assets without having to sell the house or halve the retirement account. Forcing the sale of a house or the transfer of retirement assets may mean that you will get a lower price than you would otherwise, and it could also add time and complications to your divorce proceedings.
Keep in mind that the house is money available now while the retirement money is not presently available without paying taxes and a penalty. Each person’s situation is unique and needs to be carefully examined, ideally with the legal advice of an experienced North County divorce attorney.
Dividing Retirement Plans in a Divorce: Who Gets What?
Now, we get to the question of who gets what. When is one divorcing spouse entitled to a portion of the other’s retirement plan? When can one spouse argue to keep his or her entire pension? The answers to these questions aren’t as straightforward as they might seem, and in fact there are numerous different factors that can come into play.
For example, in order to determine each spouse’s entitlement to pension and other retirement account benefits, it will be necessary to address questions such as:
- Is the entire account subject to distribution as community property? If not, is a portion considered community property, while the rest is deemed separate property?
- What is the present value of the retirement plan?
- Is one spouse willing to give up his or her share in the retirement plan in exchange for other community property assets?
For more information, you can read: How Can I Protect Specific Assets in a California Divorce?
Important: Are You a Military Officer?
Importantly, if you are a military officer, there are still more considerations that come into play. Under the Uniformed Services Former Spouses’ Protection Act (USFSPA), there are special rules that apply to military pensions. A proposed amendment to this federal law may soon change the way that military pensions get divided and distributed in a California divorce. For the latest updates, contact the Law Office of Renkin & Associates to schedule a confidential case evaluation.
How to Split Up Retirement Accounts in a Divorce
The division of retirement accounts requires a lot of attention to detail so that you do not lose hundreds of thousands or even millions of dollars. What is the most efficient and equitable way to split up these accounts?
Since most divorcing couples want to move on to the next phase of their life as soon as possible, courts tend to prefer to get an immediate resolution to the issue of who is entitled to how much and from which retirement account. It is also easier to divide the accounts as early as possible rather than waiting. Although the account or accounts may only be in one spouse’s name, anything contributed during the marriage is typically considered to be marital property to which both parties are entitled. However, the amount each party is due varies depending on the type of account.
Defined Contribution vs. Defined Benefit Plans
How is a 401(k) Divided?
In a defined contribution plan (such as a 401k), you put in a set amount, which may or may not have a match offered by your employer. Your defined contribution account is kept separate from other employees’ accounts, and you may even have some control on how the money is invested.
A defined benefit plan, such as a 401k, is subject to equitable distribution in a divorce. However, only the amount that was accrued during your marriage is considered community property. For example, if you contributed to your 401k for 10 years before getting married, and then continued to make contributions for 5 years before filing for divorce, then the entire 15 years of contributions are not considered community property. Instead, your spouse can only claim 50% of the retirement savings that you accrued during the 5 years that you were married.
Whatever portion of your 401k is split will require a QDRO to help you transfer the appropriate amount from your 401(k) into your ex’s retirement plan. A QDRO offers a tax- and penalty-free way to split your retirement plan under California law. These funds can be rolled into a traditional or Roth IRA; your divorce lawyer can help you determine which option is best for your specific situation.
To protect your 401k, you may be tempted to make a withdrawal of your 401(k) funds if you suspect that you are heading towards divorce. Doing so usually backfires. Instead of protecting your 401k, you may end up paying a greater share of these funds to your ex-spouse.
Courts view this type of action as attempting to evade an equitable distribution of community property, and may order you to pay a pre-tax, pre-penalty valuation of the funds (depending on the reason for the withdrawal). This can make withdrawing your funds particularly expensive, as you will not only pay a penalty and taxes for the early withdrawal, but you will be required to split your 401(k) as though those penalties and taxes had not been imposed.
How Is a Defined Benefit Plan Divided?
In a defined benefit plan, you receive a set amount distributed to you periodically once you reach a certain age, and your money is not in a separate account with just your name on it. In order to split up a defined contribution plan, you would look at the amount of money that was added during the marriage and what it is currently worth. You may also want to consider when the retirement account becomes vested if there are employer matches. In order to determine the current value of a defined benefit plan, you would consider when the plan will begin paying you or your spouse and what your spouse’s or your life expectancy is.
In addition to retirement assets, both spouses may be entitled to Social Security retirement benefits. If the marriage lasted for at least 10 years, the spouse that earned less during the marriage may be able to receive more Social Security benefits based on his or her former spouse’s income. There are other requirements for a spouse to be able to qualify to receive the same Social Security benefits as an ex-spouse, including that the spouse cannot have remarried. If your ex-spouse qualifies to get the same Social Security benefits as you because of the length of your marriage, this will not negatively affect your own Social Security benefits.
Schedule an Appointment with Divorce Lawyer Richard Renkin
Divorce may be the right decision for some couples. However, knowing that you are making a good choice doesn’t make the process any less emotionally draining or expensive. With the help of a skilled family law attorney, you may be able to better protect your assets – including your retirement savings.
At Renkin & Associates, we are dedicated to helping our clients achieve the best possible outcome for their divorce or other family law matter. If you would like to speak with an attorney about what you can expect with regard to your pension or other retirement plan during your divorce, please reach out to our law office. To request an appointment with divorce attorney and Certified Family Law Specialist Richard M. Renkin, contact us online or call 866-228-7116 today.