Surprise! Even a retirement account is subject to division in a divorce. While most spouses expect to split the house and the bank accounts, somehow the idea of giving up part of a retirement account can come as a shock. However, your spouse will probably be credited with half of whatever you added to the account during the marriage. Yes, it's time to get out the calculator.
Dividing Retirement Accounts in Divorce
In most states, retirement accounts are considered community or marital assets that are split between spouses if they divorce. Although it is important to arrive at a fair division of the retirement benefits, the calculations and procedure for dividing them can be very complicated. The type of benefit being divided is a critical element in how the division takes place.
Retirement accounts generally fall into two types: defined contribution plans and defined benefit plans. Defined contribution plans often use 401(k) accounts to which the employee and/or employer make contributions. Defined benefit plans are generally part of an employee's salary packet, with a pension based on the employee's wage level and years with the company. They pay monthly benefits starting at the employee's retirement and continuing for the rest of the employee's life.
Divorce Retirement Calculator
Before you can divide retirement benefits, you need to figure out its present value. This is easy enough with a defined contribution plan, since it is usually the money in the account as of the date of separation or divorce. Be sure to include only the money brought into the account during the marriage, excluding retirement money earned before and after the marriage. Determining present value of a defined benefit plan is more complex, and you may need to bring in an expert to figure it out.
After you get the present value of the account, you must divide it up. If the marital assets are sufficient, the person holding the retirement account can be assigned the entire account, while the spouse is given other marital assets that have the same value. Obviously, this method can only be used if you can determine a present value of the account.
Another option is to postpone division of the benefits until they are payable to the employee. The court sets out the division of benefits in a Qualified Domestic Relations Order (QDRO). It specifies how much of each payment each spouse is to receive.
Negotiating a Settlement
In states with community property laws, all income earned by either spouse during marriage belongs to both spouses. Each is entitled to 50 percent of all marital assets in a divorce. That means that your spouse will probably get a full half of whatever retirement money you earned during your marriage, like one-half of the 401(k), or 50 percent of whatever pension amounts are attributable to your earnings during the marriage.
In other states, courts divide property equitably rather than equally. You will have more room to negotiate a settlement of the retirement account in equitable division states.
- Company benefit plans usually begin pay out at retirement, which means that you won't receive any payments until your own normal age of retirement.
- If you decide to make actuarial calculations yourself, make sure to have your conclusions checked by an expert.