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Division of retirement plans in a divorce

A few months ago, we wrote about some of the issues older couples face when divorcing. One of the items addressed was the division of retirement accounts.

Today, we’re back with specifics about how you can determine the value of different retirement plans that are subject to division in a divorce. After all, a marital asset cannot be fairly divided until you both know its worth.

What are the different types of retirement plans?

There are many types of retirement plans. Two categories of retirement benefits are available through your employer:

  • Defined contribution plans, such as 401(k)s
  • Defined benefit plans, such as pensions

You can also create retirement plans separate from your employment, such as Individual Retirement Accounts (IRAs) and similar investments.

Defined contribution plans have a daily cash balance so their value is relatively easy to determine. It can be a bit more challenging to calculate the value of a pension as they generally don’t have a daily cash value. Pensions instead serve as a promise to pay someone a specified amount once they retire. Also, pension benefits earned prior to the marriage are not considered marital property, which further complicates pension valuations.

What to know about the division of retirement plans in a divorce

IRAs and similar retirement assets are generally easier to divide than retirement plans sponsored by employers. Employer-based plans are typically divided through the preparation and entry of a qualified domestic relations order (QDRO). Non-qualified plans, such as IRAs, do not usually require the additional step of the QDRO to divide the retirement account and only need basic paperwork to complete the transfer.

When a defined contribution plan or IRA is divided as part of the divorce proceedings, the spouse receiving a portion of those retirement plans can generally rollover his or her share into another IRA without incurring penalties or taxes. Once such funds are spent, however, ordinary income taxes and a premature withdrawal penalty on that money may apply.

The division of a retirement plan, like any property division, can quickly become complicated. There’s an added level of complexity associated with dividing retirement plans. Early withdrawal penalties and taxes can result from certain retirement plan transactions that can only be avoided (or managed) by taking the proper steps.

Before you commit to any division of your retirement assets, it’s wise to take a step back and discuss all of the potential consequences of your actions with an experienced family law attorney and your financial advisor