Retirement is generally a topic that nobody likes. Not the divorcing couple, not their lawyers, not the courts.
Retirement involves complex financial and tax issues that are often hard work and no fun.
Retirement often isn’t on your radar when other more pressing issues of child custody, debts, and alimony are vying for your immediate attention.
And sometimes people think that they get to keep their retirement accounts without sharing with their spouses, so they don’t think retirement is a divorce issue.
As a result, division of retirement funds can and often are not given the attention it deserves, and you can end up with a division of your and/or your spouse’s retirement funds you neither wanted nor understand, and without even knowing it.
Retirement assets are in some ways like any other marital asset. They have value. They need to be divided. But retirement assets can also be kind of special, if they end up being your most valuable marital asset, or if you divorce near retirement age. We usually think of our houses as being the most valuable thing, but, retirement plans, especially as you grow older, can become more valuable.
Don’t assume that you’re best off keeping the house while your spouse keeps his or her retirement. Compared with retirement savings, a home is more likely to have ongoing and unexpected expenses and its future value and liquidity are more complicated. Sometimes you can offset the value of your retirement against other marital assets so that you get to keep your retirement account completely intact.
Other times, however there simply aren’t enough offsetting assets, or your spouse may not want assets to offset his or her access to the cash in your retirement account. That involves giving the entire plan to one spouse and offsetting that value with some other asset, maybe the house. Other times, it involves entering a qualified domestic relations order; a special court order called a QDRO, that will actually instruct the plan administrator to make payments directly from the plan to the non-employee spouse. It can be a tricky asset to deal with and a tricky asset when we are making financial decisions.
Remember also that different kinds of retirement accounts receive different tax treatment. Pre-tax accounts, like a 401(k), 403(b) or regular Individual Retirement Account or IRA, are taxed when you withdraw money in retirement. Roth IRAs aren’t taxed when you withdraw the funds at retirement. So if you have $200,000 in a 401(k) and your spouse has $200,000 in a Roth IRA, and you decide to let each other keep the account in his or her name, that won’t result in an equal division of assets because of the different tax treatment. Most people aren’t aware of the one-time opportunity for a divorcing spouse under age 59½ to withdraw money from his or her ex’s 401(k) or 403(b) without owing the normal 10 percent tax penalty, if the assets are allocated to under the qualified domestic relations order, or QDRO.
But if you want or need your share of your spouse’s retirement accounts now to pay for some expenses, you can do that too, although that will result in a 10 percent early-withdrawal penalty– if you’re under age 59½. 401Ks and IRAs are known as defined contribution plans. They are essentially savings accounts and divided by splitting money up between spouses. But there are also defined benefit plans. They are not accounts into which your employer deposits money over time. Defined benefits plans are more expensive for employers to maintain, and so they are becoming more rare. The important thing to know about defined benefits plans are that until you are “vested” in the plan, you have no right to any money. If you leave your company before retirement age, you can take 401K or IRA with you. But your defined contributions plan isn’t portable. Yet in divorce your share as a spouse, of a defined benefits plan, can be awarded. But because defined benefit plans can’t be valued based upon actual dollars in the present, they are more difficult to valuate in divorce. Valuation of the plan may require an expert to ensure the division is fair and enforceable.
This is just an introduction to the effects of divorce on retirement. Please take advantage of the other videos, articles, FAQs, and forms about identifying, valuing them, and distributing retirement benefits on our website, and to schedule an appointment to discuss retirement and other divorce concerns, contact us at: 801-466-9277 | eric@divorceutah.com