Dividing Pensions and Retirement After a Divorce
If you are going through divorce, it is crucial that you do not neglect how you or your spouse’s retirement assets are divided. An individual’s retirement accounts – typically a pension and/or an IRA (individual retirement account, or 401(k)) – may be his or her largest asset.
Retirement funds obtained during the marriage are typically treated as marital property. How these assets are divided can have a long-lasting impact on either spouse’s financial well-being.
Proper division of a couple’s retirement assets in the wake of a divorce requires a court order known as a “qualified domestic relations order” (QDRO). A QDRO defines how an alternate payee will obtain all or part of the benefits a retirement plan participant has accrued. The order allows the plan administrator to distribute funds from a plan member’s account to the alternate payee, in this case an ex-spouse.
If a properly drafted QDRO is not part of your separation agreement, it could be a costly mistake. At Charles R. Ullman & Associates, we recognize the importance of developing a proper QDRO for our clients. We can help you address the issues that pertain to dividing pensions and retirement in a North Carolina divorce to ensure that your best interests are protected.
Identifying Assets in a Retirement Plan
When a couple divorces, they typically divide their assets as part of their separation agreement. In most cases, this should include assets either spouse may have in a 401(k) plan, 403(b) plan (for public school or tax-exempt organization employees and certain ministers), pension plan or any other retirement program.
Depending on a spouse’s age and work background, they may have several tax-deferred accounts that make up their retirement assets. These might include programs attached to current employment, accounts from previous employment and/or private investments, such as Roth IRAs. In a contentious divorce, it may take some investigation to discover the entirety of a spouse’s retirement assets.
In most cases, the money in a retirement account is treated as marital property in a divorce. If a spouse had money in his or her 401(k) or a similar tax-deferred savings program when the couple married, those funds would be considered separate property. This means they would not be included in the division of assets. But any increase in value of that separate property during the marriage might be considered marital property.
A QDRO is necessary to ensure that retirement program assets are properly distributed. A QDRO is a court order that allows the retirement plan administrators to divert funds to the ex-spouse in a manner that does not result in penalties.
Keep in mind that non-qualified plans – supplemental executive retirement plans, excess benefit plans, stock options, restricted stock or deferred compensation – are not subject to QDRO rules. Military pensions, as well as federal, state, county and city retirement plans, also have their own rules regarding division during a divorce. Each must be examined for their potential value and addressed individually in a separation agreement.
Putting a Value on Retirement Accounts
One of the aspects of dividing retirement accounts in a divorce involves determining exactly how much money is subject to division. This is due to factors such as whether an account is fully vested, how much the account grew during the marriage, and what contingencies may affect the value of a defined-benefit plan, such as a pension, for example.
A fully vested defined-contribution retirement account such as a 401(k), 403(b) or IRA that was opened during the marriage and funded only with marital funds would be among the easiest retirement assets to divide. Generally speaking, the account’s full balance would be subject to equitable distribution. It is trickier when the spouse began contributing to the account before marriage, or if the employer’s matching funds are not yet fully vested.
It’s often even trickier to establish the value of a defined-benefit plan, such as a pension. That’s because there are many factors that are still up in the air if the spouse is still working. Unlike a defined-contribution plan (an IRA or 401(k), for example), you can’t just check the balance on a pension. Instead of accumulating money over the years from contributions, pensions are often determined based on the worker’s years of employment and the salary earned in the last year before retirement.
In order to determine the fair value of a pension that is subject to equitable distribution, North Carolina courts will typically consider factors such as:
- When the employed spouse will be eligible to retire.
- The employed spouse’s life expectancy.
- The anticipated value of the pension on the earliest retirement date.
- The discounted value of the pension at the date of separation.
- Contingencies that may reduce the pension’s value.
Due to these and other complexities, is critical to seek help from an experienced attorney who has access to financial experts when attempting to establish the value of retirement benefits in a divorce. That is true whether you are the divorcing spouse who has earned retirement benefits or whether you are the spouse who stands to receive part of your ex-spouse’s retirement benefits.
Tax ramifications are another reason why skilled legal advice is necessary when dividing retirement benefits during a North Carolina divorce. Depending on how the assets are transferred, the resulting tax liabilities may vary greatly. An experienced divorce attorney can help ensure that taxes are minimized on any distribution you receive.
Changing Beneficiaries on Retirement Accounts
It is important not to overlook changing the beneficiaries on your retirement accounts after a divorce. Even if the assets are properly distributed in the divorce proceedings, your ex-spouse will likely remain the named beneficiary on your retirement accounts unless you take action. That means your ex-spouse would stand to inherit your portion of your retirement benefits upon your death.
In many instances, changing the beneficiary may be as simple as contacting the plan administrator and filling out a form. In other instances, you may be required to produce documentation that you have experienced a “major life change.” Divorce certainly qualifies as a major life change, and a copy of the divorce decree, separation agreement or similar document will typically suffice.
Concerned about Retirement Benefits in a Divorce? Get Legal Help Now
At Charles R. Ullman & Associates, we recognize that when it comes to divorce, the consequences for you and your family are quite serious, especially when considering your future and your retirement. We’re here to help. If you would like more information, or to schedule a confidential consultation with our Raleigh divorce lawyers regarding retirement assets in your divorce or other matters, contact us by calling us toll-free or by filling out our online contact form.