Don't overlook retirement benefits when dividing property in your divorce. They can be significant assets, maybe worth even more than your home.
Makes sure they're properly identified and evaluated so you get your fair share.
Analyzing Retirement Benefits
In putting together a divorce settlement, it helps to analyze retirement benefits in four steps:
- Identify the available benefits
- Determine if they're shared marital property belonging to both spouses
- Determine how much the benefits are worth
- Decide how to divide and distribute them
Types of Retirement Benefits
There are many kinds of retirement benefits. They're provided by private or government funds.
Private benefits include:
- Private pension plans. These are retirement plans sponsored by private employers. "Qualified" plans get special income tax advantages under the Internal Revenue Code (IRC). They're regulated by a federal law called the Employee Retirement Income Security Act (ERISA). You may have to work a set period of time before these benefits are vested. Once vested, they belong to you even if you leave your job. They include thrift plans, savings plans, 401Ks, and profit sharing plans
- Executive retirement compensation. This includes company retirement plans for top executives or highly-paid employees. They don't qualify for certain tax benefits under the IRC, so they're called "non-qualified" plans. ERISA doesn't apply. They include top hat plans, excess benefit plans and stock options
- Individual Retirement Accounts. Known as IRAs, these are private savings accounts at banks or other financial institutions. They give tax advantages on money saved for retirement
Government benefits include:
- Civil service or public pensions. These are paid to federal and state government workers, like teachers and policemen
- Military pensions. Service personnel qualify to receive retirement pay after serving in the military
- Social Security. The Social Security Act provides old-age benefits for workers, spouses, dependents and ex-spouses
Yours, Mine or Ours
Once you identify the retirement assets earned by you and your spouse, you have to figure out if they're separate property belonging to one of you, or marital property you share. That determination depends on what type of benefit it is, when it was earned and the state and federal laws that apply.
- Private pensions. Most states treat any pension interest earned during marriage as marital (or community) property belonging to both spouses. A few states, Arkansas, Indiana, and North Carolina, treat only vested pension benefits as marital property. Alabama law says pension benefits are marital property only if the couple was married at least 10 years during the time the benefits were accumulated
- IRAs. In most states, an IRA is marital property if it was established during the marriage. An IRA started by one spouse before the marriage could be considered marital property if contributions were made to the account during the marriage
- Civil service pensions. For the most part, public pensions are treated like private pensions in that benefits earned during marriage are marital property. But special laws apply to some pensions. For example, laws in Missouri and Kentucky protect teachers' retirement pay from being split as marital property
- Military pensions. In the past, military pensions couldn't be divided by state courts in divorce cases. But a federal law passed in 1982 now allows such division. Pension payments to an ex-spouse can't exceed 50 percent of a veteran's retirement pay. Disability benefits are the service person's separate property
- Social Security. Social Security benefits are the separate property of each spouse. If you were married at least 10 years before your divorce and aren't remarried, you can collect benefits through your ex-spouse's account when you hit age 62. The Social Security Administration can give you more information about Social Security benefits and divorce
Valuation and Distribution
There are several ways to evaluate and distribute retirement benefits in a divorce. The laws in some states specify the method that must be used.
Here are some common ways it's done:
- Cash out. Some retirement accounts can be liquidated and divided at the time of the divorce. But this won't work for a lot of assets. Many pensions aren't accessible before retirement age. Fees, penalties, and taxes for early withdrawal could destroy the value of many accounts
- Immediate offset. In this method, the retirement account is left intact to grow and mature for the employee-spouse. But the other spouse gets money or property to "offset" his or her share of the asset's present value. However, you do need enough assets to make an offset work
- Continued jurisdiction. In this method, the divorce court retains jurisdiction over the case and doesn't divide the benefits until they're paid out to the employee-spouse. This lets the court consider any changes that occur between the time the couple splits up and the time benefits are paid. The down side: Matters could be unsettled for years
- Deferred distribution. In this method, the court issues an order at the time of the divorce that allows the non-employee-spouse to receive his or her share of the retirement pension when the employee-spouse begins to receive pension payments. In ERISA plans, a court order called a qualified domestic relations order (QDRO) is used to direct the pension plan administrator to pay out a percentage of the benefits to the employee's ex-spouse
Splitting up retirement benefits in a divorce is complicated. There are many kinds of benefits, it's hard to determine their value and different state and federal laws apply.
To protect your interests, you need help from an experienced divorce attorney. You may want to consult financial and tax experts as well. It pays to invest in expert help now to help secure your retirement future.
Questions for Your Attorney
- How can I get information about my spouse's retirement benefits?
- How can you figure out how much my retirement account is worth? Does this calculation include future growth and taxes?
- Do the laws in my state specify the method that must be used to divide my spouse's retirement pension?