Divorce is known to take a substantial emotional and financial toll to all parties involved. It’s crucial to make informed financial decisions regarding the division of assets that you and your spouse have accumulated during your marriage. For example, retirement savings are one of, if not the largest and most valuable financial assets a person can own. Therefore, retirement savings are generally an important issue in divorce proceedings. Like most important issues, retirement savings and divorce can tend to be very complicated, especially if they are not handled properly.
When handling an employer-sponsored retirement plan, like a 401(k) or a pension plan, you are legally entitled to half of the amount of the pension earned during marriage. This is assuming there is no prenuptial agreement that states otherwise. Typically, a pension that is earned by one spouse is considered a joint asset of both, which can mean it’s subject to division in divorce proceedings.
Let’s say your spouse was the primary breadwinner for the household and you are interested in knowing how to protect your share of his or her retirement account. There are a couple steps you can take to protect your benefits.
Qualified Domestic Relations Order (QDRO)
A “Qualified Domestic Relation Order” (also known as a QDRO) is a court order, judgment, or decree related to child support, alimony, or property rights that can also instruct your spouse’s pension plan on how to pay you your share of plan benefits.
A QDRO gives you protection and guarantees that a marital settlement agreement does not by allowing the funds in the retirement plan to be separated and withdrawn without penalty and the deposited into the non-employee spouse’s retirement account (typically an IRA) or otherwise making provisions for payout.
It is extremely important to noted that QDROs are only applicable to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (also known as ERISA).
QDRO do not apply to military or government pensions, which are governed by other laws. You also generally do not need a QDRO to divide IRA or SEP assets unless there are special calculations as to the award to the non participant spouse.
Consider Consulting an Attorney or Specialist
A QDRO is not considered Qualified unless it’s been approved by the retirement plan’s Plan Administrator and the court.
Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are adequate, but if your share of your spouse’s retirement account is substantial, you should consider using an person or business who specializes in QDROs to ensure that all of the related items in your marital settlement agreement are incorporated into the QDRO. Additionally, when writing the QDRO, it’s important to keep the type of retirement plan in mind.
401(k) plans are considered defined contribution plan assets and they are easier to calculate than defined benefit plan assets (like pensions).
This is because defined benefit plan payments are based on complex actuarial calculations and factors such as years of employment. If your spouse has this type of plan, your lawyer will probably have to hire an actuary to calculate your share of the plan assets.
Your Potential Payout + Your Specific Pension Plan Details
In most states, funds that are added to retirement accounts during a marriage are technically considered marital property. This means that both you and your spouse have a right to them.
However, if either of you entered the marriage with funds already in a retirement account, those funds are generally treated as separate property in a divorce.
As a general rule, the assets that are considered marital property, or those that were contributed during the marriage, along with their earnings are the assets that are divided in the event of a divorce.
The timing of your payment will depend on the type of plan. For example, if your spouse has a defined contribution plan, like a 401(k), that plan makes an immediate lump sum payout while other plans pay lump sum in the future or even make periodic payments. There are some plans, like a company pension plan, on the other hand, you are likely to receive monthly payments starting at your normal retirement age.
It’s also important to check the details of the pension plan. There are two elements that you should try to focus on: the method by which payments are distributed and whether the plan offers a survivor’s benefit. As mentioned above, the timing of your payments will depend on the type of plan.
With a pension, you typically have a choice between receiving a lump-sum payment or a monthly annuity. If your plan features a single-life payout and you choose the annuity option, the payments would stop at your death. On the other hand, if the plan has a joint-life payout, your spouse would continue receiving payments from the plan after your death.
The Bottom Line
Divorce can be costly be in terms of attorney fees and emotional health. But it can also have costly effects on your future financial assets. Ensuring that you take the appropriate legal steps to protect your rights is crucial.
If you have any questions or would like to make an appointment, give Gloria Petroni a call at (775) 420-4221.