Dividing Retirement Accounts in Divorce
One of the biggest assets that we divide in divorce are retirement accounts. Whether we’re talking about IRAs, 401(k)s, 403(b)s, pensions, stock options, TSPs, or any other type of account, if they were earned during the marriage, they’re marital property and subject to division in any action for divorce.
Retirement is actually (usually!) an easy area of law, because a formula is applied. You’re entitled to 50% of what was earned during the marriage – that’s actually the law, and what we refer to as your “marital share”.
Retirement is different from support, even though it might not feel that way because you receive the benefit monthly once one of you has retired and starts collecting on an account. An interest in a retirement account is a property right, as opposed to a support obligation.
Still, depending on the type of account, how it is actually divided may be more or less complicated (and, therefore, costly).
How are retirement accounts generally divided?
In most cases, we usually just divide the marital share in half. That doesn’t mean that we halve all of the marital accounts, though – in most cases, that would be unwieldy, since many of them require specific documents filed with the court and then recorded with the financial institution in order to complete the division.
If, for example, one party has more than the other, we can often accomplish the transfer by just taking the overage, dividing by two, and transferring that amount.
Let’s talk real numbers. If one party has $100,000 in a 401(k), and the other has $50,000, assuming it’s all marital, the difference is $50,000 – so $25,000 each.
Instead of taking half of the $100,000 account and half of the $50,000 and swapping them around (which is two transfers), we’d just take $25,000 from the bigger 401(k) and deposit it into the smaller. Ba-da-bing, ba-da-boom – both accounts have $75,000, and only one transfer was completed.
How are transfers done?
In tax deferred accounts, like 401(k)s, we use a Qualified Domestic Relations Order to transfer funds. A QDRO (pronounced quad-row) allows us to roll the balance over from one account to another without penalty. It also allows you, if you choose, to take your portion in cash – but then, of course, you’d pay taxes on it as income (and who wants to pay Uncle Sam more than they have to?) and may also pay a series of administrative fees.
In fact, many financial institutions charge administrative fees as it relates to QDROs, which is a big part of why we want to minimize the number of transfers. In a recent divorce that one of our attorneys handled, the financial institution involved wanted $950 to review the QDRO, and then an additional $950 to enter it after it was received from the court! That’s a lot of money to skim off the top.
And then you also add the attorney man hours in drafting the QDRO, and you have a fairly expensive transaction. Anyway, all that to say that the fewer QDROs drafted, the better!
In other accounts – like IRAs, for example – no QDRO is needed. So, wherever possible, if I could, I’d effectuate a transfer from an IRA account and avoid touching a 401(k), where a QDRO would be needed.
Thrift Savings Plans (or TSPs), on the other hand, require a much simpler order – not a full QDRO. If you’re military, you should probably also be aware with any requirements related to the new blended retirement system.
Pensions are unique animals, and each plan has its own requirements. There are often documents needed to transfer interests from one spouse to the other, but it’s less standardized than a typical 401(k)/QDRO situation.
Anyway, all that to say that you need to be aware of the type of account that you have, and what kind of transfer will be necessary. These types of things can really add up in terms of expenses on the back end of your divorce, so you’ll want to be sure that you get it right and have the information up front for your own planning purposes.
Can we do something different than the norm to divide our retirement accounts?
Sure! It’s important to be aware of your goals and communicate them to your attorney, so we can be sure to meet your needs.
I have a client right now that I’m drafting an agreement for that we’ve proposed a really interesting division of the retirement accounts. I don’t want to go into too much detail, since it’s an ongoing case, but suffice it to say that I think it’ll work out really well for her under the circumstances. She knows what her goal is – in her case, for her husband to waive his interest in the equity in the home – and she’s come up with a plan that will help her achieve it.
Hey, it’s her divorce! And if I can achieve for her the result she wants, I’m all for it. In fact, it’s exciting to do things a little bit differently to reach a specific goal, so I’m glad she communicated it to me.
For more information, to discuss the specifics of your situation in a confidential consultation, or to chat with one of our client intake specialists (who can help point you in the right direction), give our office a call at 757-425-5200.