What Is the Best Way to Split Up Retirement Plan Assets in Divorce?
For a number of Americans, retirement plan assets are a significant part of their financial future. This means that, in the event of a divorce, figuring out how to split up these plans in the form of property division can present a challenge.
Most states–including Florida–treat retirement plans as marital property. Therefore, unless there is a prenuptial agreement in place dictating otherwise, these plan benefits have to be divided up in some way and dividing them carries certain tax implications. Therefore, if you are contemplating divorce, you want to make sure that you work with a divorce attorney who understands how to address this kind of property division.
Qualified Domestic Relations Order
One way in which individuals receive benefits from a retirement plan is through a Qualified Domestic Relations Order, which is simply a decree or order for a retirement plan to transfer half of the marital portion of a retirement plan to the other spouse.
These benefits must be reported. In addition, they can also be rolled over into a new retirement account, such as an IRA. However, it is important to note that Qualified Domestic Relations Orders only apply to qualified retirement plans covered by the Employee Retirement Income Security Act. They cannot be used, for example, to split up IRA assets. IRAs are split up in other ways, as discussed below.
Defined Contribution Plan
A defined contribution plan is another example of a retirement asset that can be split up. The most common example is a 401(k) plan. Splitting up 401(k) plans are fairly usually straightforward because they have a very obvious balance. In addition, if you receive payments from your ex from a 401(k), you can also roll them over into a new retirement account without resulting in tax consequences (although note that this is not required).
It is also important to note that, while there are typically tax repercussions to taking distributions from a 401(k) prior to reaching a certain age, this is not the case when it comes to splitting a 401(k) through a Qualified Domestic Relations Order. The spouse receiving a new 401(k) through the Qualified Domestic Relations Order can take a onetime disbursement, within a certain time frame, and simply pay regular income taxes on that disbursement.
Defined Benefit Plan
Another example of a retirement asset is a defined benefit plan, such as a pension. These are a little more difficult to value, as a pension is essentially a ‘promise to pay’ in the future. In addition, any benefits accrued prior to marriage are not considered marital property, therefore, that pre-marriage portion has to be removed in determining the share that goes to the other spouse.
There are three methods that are typically used to divide pension assets, including:
- The deferred division method, whereby each been each spouse is granted a share of the benefits only once paid by the plan;
- The present value method, whereby one spouse receives a lump sum settlement; and
- Reserve jurisdiction, where the court retains the authority to determine distributions in the future.
It is also important to note that you can preserve your rights to receive survivor benefits with respect to these plans via Qualified Domestic Relations Orders in the form of survivor benefits.
Individual Retirement Account (IRA)
Finally, individual retirement accounts, or IRAs, are fairly simple to divide in the event of divorce. The court determines each spouse’s share and payments are rolled over into another retirement account without tax consequences. However, note that, if you spend the proceeds, you are subject to income taxes and the premature penalty on early withdrawals.
Contact Our Florida Family Law Attorneys To Find Out More
While splitting up retirement accounts in the event of a divorce can be complicated, just like many other issues during the worst, working with the right property division attorney can make all the difference. Contact our Orlando divorce attorneys at Greater Orlando Family Law today to find out more.