The division of marital properties is always complicated, but the process is especially difficult with retirement accounts. The primary complication is whether you own a defined benefit, or a defined contribution plan. IRAs and 401(k)s are defined contribution plans, into which both the employee and employer make systematic contributions. The most common method involves the employee contributing a portion of each paycheck, which is partially or fully matched by the employer.
If you are filing for divorce, the idea of losing a good chunk of your retirement savings is sure to be one of your biggest concerns. You may even feel a sense of injustice over the fact that your spouse is entitled to something that you earned solely through your own efforts. The law, however, does delineate between contributions that were made before and during your marriage. In short, your spouse's portion of your account is based only on the funds that were accrued while you were married. If you were only married for a few years, this may not be as significant as you had anticipated. On the other hand, if you were in a longterm marriage, or started your accounts after you married, your spouse may be entitled to a lot more than you may have expected.
The formula for dividing IRAs and 401(k)s is relatively simple in that it's based on set contributions that were made on a systematic basis. This makes it easy to derive a current value, from which your spouse will be awarded up to one-half, depending on the circumstances. Although defined contribution plans are easier to valuate than defined benefit plans (pensions), it's important to get accurate figures from a qualified accountant. You will also need to understand the tax consequences of withdrawing from a defined contribution plan before the age of 59 1/2.. With a 401(k), you will need to need to file a Qualified Domestic Relations Order (QDRO) to ensure that your payout to your spouse does not count as a taxable
distribution. IRAs can be divided without a QDRO, but you will need to include written instructions for the distribution in your divorce decree. IRA withdrawals that are not spelled out in a divorce decree are viewed as taxable distributions, which are subject to a 10% early withdrawal penalty. Early withdrawal penalties also apply to 401(k) distributions, unless your spouse agrees to a cash payout, as opposed to a
rollover. These terms, including the stipulation that he or she cannot reinvest the funds, should be clearly spelled out in your QDRO.
As you can see, the rules governing the division of retirement accounts are incredibly complex. Further complexities arise when both spouses own a variety of accounts, including pension plans. Deciding on the fairest distribution method for you and your spouse requires legal advice from an experienced divorce attorney. For more information about dividing retirement accounts in a divorce, please speak with the attorneys of Villani & DeLuca, P.C.