Among the many assets that get divided during a divorce or dissolution of marriage, retirement accounts are often amongst the most valuable and complicated assets to be divided. It’s critical to make certain all retirement accounts are identified and properly divided.
Retirement assets are treated separately from non-retirement assets, because they are subject to income tax upon withdrawal from the retirement plan or account, and because they are intended for the use in the future and subject to a penalty if withdrawn before age 59 ½.
There are generally two types of retirement plans. The first is defined contribution plans, which include 401k, IRA, and other retirement accounts where employees defer income for retirement, often times with their employers making matching contributions. The second type of plan is a defined benefit plan, which includes pension plans, such as OPERS, STRS, Police and Fire Pension, etc. Pension plans have become less common due to the expense and lack of cost certainty to the employer. Defined contribution plans have a readily ascertainable value, because they provide a fixed income over time, and they must be appraised if you wish to determine their current value for offset purposes.
Retirement accounts usually require a special order to be divided, so that the division is not subject to income tax when the retirement assets are assigned to the other spouse. A “qualified order”, such as a Qualified Domestic Relations Order “QDRO”, must be prepared to divide the retirement account or plan. However, there are many critical issues to address to make sure the QDRO is fair to both parties.
For example, merely dividing a retirement account based upon a fixed dollar amount is not fair, because market fluctuations, income earned and other changes to the account between the time the agreement or order is made and the account is actually divided may result in a very significant change to the value of the account prior to the actual division. Retirement accounts should be divided by percentage, including all earnings and market changes through the date that the account is actually divided.
Pension plans have many of their own issues. The QDRO must address issues such as cost of living adjustments (“COLAs”), and joint and survivor benefits, so that the plan benefits are equally divided between both spouses and the pension payment does not terminate to both spouses upon the death of the plan participant.
Dividing retirement assets is just one of the many unique challenges that people face during termination of a marriage. At Vernau Law LLC we have experience in properly and fairly dividing retirement assets in termination of marriage cases, and we have drafted the qualified orders for every type of retirement plan that you may need. Apart from financial issues, we can also provide support in many other areas of law. You may visit us online at www.vernaulaw.com. If you’d like to schedule a consultation, call (740) 587-2637.