Dividing Defined Contribution Plans
As part of a defined contribution plan, both employees and employers contribute a set amount or a percentage of a paycheck each month to a savings account. These savings account funds build until the employee goes into retirement. If, during the course of a marriage, the employee spouse contributes to a 401 or other retirement account such as an IRA or a 403, Virginia courts consider the following when dividing its value between spouses:
- The dates of the marriage. If the marriage lasted 20 years, and the employee spouse contributed to the 401 for 25 years, then the contributions made to the account in the years preceding the marriage are exempt from division of assets. Those five years of individual contributions are protected as separate property.
- The 50 percent rule. Virginia courts want to ensure fairness when splitting the value of retirement accounts. While allocating assets from the 20 years of eligible retirement account contributions, Virginia holds that the non-employee spouse must not receive more than 50 percent of the marital value. Therefore, if the non-employee spouse is eligible for a full 50 percent of the retirement accounts value, she will receive 10 years worth of contributions.
How To Divide Retirement Accounts In A Divorce
On Behalf of Cunningham Law Office | Dec 3, 2020 | Divorce |
As many as 50% of couples in Montana and across the United States will end their marriages. In many cases, retirement assets, such as 401 and IRA accounts, will need to be divided in a final divorce settlement. It is important to understand how to divide these accounts properly to minimize the possibility of triggering an unintended taxable event.
Drafting A Qdro During Divorce
A DRO is not considered “qualified” unless it’s been approved by the retirement plan’s administrator and the court. Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are good enough, but if your share of your spouse’s retirement account is large, you may want to work with a lawyer.
A lawyer who specializes in QDROs can ensure that each aspect of your marital settlement agreement is part of the QDRO. They can also help ensure that your rights are fully covered in a way that a basic QDRO form may not be able to provide.
If your lawyer is not experienced in QDROs, it might take them longer to do the research and fill out any forms, which could end up costing you more in legal fees. There’s also the chance that they could miss something important that could cost you money.
Another factor in the writing of a QDRO is the type of retirement plan in question. Defined contribution plan assets plans) are easier to calculate than defined benefit plan assets . That’s because defined benefit plan payments are based on complex calculations as well as other factors, like years of employment. If your spouse has this type of plan, your lawyer may have to hire an actuary to figure out your share of the plan assets.
Also Check: How Do You Withdraw From 401k
Who Gets The 401k In A Divorce
Many retirement funds are often overlooked in divorces because they are far off and not worth anything currently due to their inaccessibility however, a 401k is accessible at any time if you are willing to pay the taxes on the money to make the withdrawal. This means that if you or your spouse has a 401k, that money will be considered in the divorce settlement. Your 401k will be included in the divorce settlement, so you need to consider its worth to you and if you need an attorney to help protect the money you have saved.
Can I Change The Division Of My Retirement Account After The Divorce
You must follow what is specified in a divorce decree.
If you have a 401, then the details of how a retirement account must be handled will be specified in a QDRO.
If you have an IRA or a SEP, then the division of that asset must follow the terms specified in the decree.
If you make any material changes in a retirement account either before, during or after a divorce that go against what is specified in legal documents or as otherwise required by statute, you could be setting yourself up for legal battles that you may have a hard time winning.
When in doubt, consult an attorney or Certified Divorce Financial Analyst about the right steps to take.
Read Also: How Do I Open A 401k Account
When Is The Value Of The Retirement Accounts Determined
The value of retirement accounts can vary by state, but a good rule of thumb is that any funds added to a retirement account during a marriage will be considered marital property.
Any earnings generated during that time are also considered marital assets as well, and subject to distribution based on the laws of the state where you are getting a divorce.
The point in time when a retirement account is assigned a dollar amount is known as the valuation date.
However, if you entered a marriage and you already had funds in a retirement account, then those funds will generally be treated a separate property in most cases.
They will not be subject to equitable distribution or community property laws, but the burden of proof establishing such pre-marital separate property lies solely with the party making such claim.
The date of separation is generally considered the cut-off date for when funds are considered marital property, but the valuation date can also be the date of a divorce trial, or the date a divorce complaint was filed.
This means any funds you contribute after your date of separation may be considered as separate and not subject to being labeled as a marital asset or to be divided among both spouses.
Again, the rules here vary by state, so it is best to check with an attorney to make sure of how this works in your state.
Defined Contribution Vs Defined Benefit Plans
How is a 401 Divided?
In a defined contribution plan , you put in a set amount, which may or may not have a match offered by your employer. Your defined contribution account is kept separate from other employees accounts, and you may even have some control on how the money is invested.
A defined benefit plan, such as a 401k, is subject to equitable distribution in a divorce. However, only the amount that was accrued during your marriage is considered community property. For example, if you contributed to your 401k for 10 years before getting married, and then continued to make contributions for 5 years before filing for divorce, then the entire 15 years of contributions are not considered community property. Instead, your spouse can only claim 50% of the retirement savings that you accrued during the 5 years that you were married.
Whatever portion of your 401k is split will require a QDRO to help you transfer the appropriate amount from your 401 into your exs retirement plan. A QDRO offers a tax- and penalty-free way to split your retirement plan under California law. These funds can be rolled into a traditional or Roth IRA your divorce lawyer can help you determine which option is best for your specific situation.
How Is a Defined Benefit Plan Divided?
Recommended Reading: Can I Use My 401k To Buy A Second Home
Dividing Your 401k In Arizona
Once the actuary determines the amounts that are community property and separate property, the process is rather simple. If your spouse and their attorney agree to the amount determined by the actuary, then the funds that are to be given to your spouse will simply be transferred from your 401k account into another tax-deferred savings option at the time that the divorce is made final.
Transferring it to another savings medium is preferable in order to avoid paying the fees and taxes involved in removing money from your 401k early. If your spouse wants the cash now, a talented attorney will ensure that the taxes are paid by your spouse and not yourself. If they agree to the transfer, your plan administrator will be able to help you work through this transfer and all that will be required of you to make that change to your benefits plan.
Social Security And Life Insurance
If your marriage lasted 10 years or more, and you have been divorced for more than 2 years, and you are unmarried, you can claim Social Security benefits on your ex-spouse’s work record once you reach age 62. There are some other caveats: You can only file on your ex-spouse’s work record if the benefit you would get based on your own work is less than the benefit you would receive based on your ex-spouse’s work.
Your benefit as a divorced spouse is equal to half of your ex-spouse’s full retirement amount, if you start receiving benefits at your full retirement age.2
If you’re receiving alimony or child support after divorce, life insurance on the person making payments may help protect that income. It is possible to set up the divorce agreement so that the cost of life insurance is included in alimony or child support payments.
Disability insurance should also be a consideration. In some cases, divorcing couples may be ordered to split life insurance policies. Whole life insurance has a cash value and may also be on the table for division in a divorce.
With no support issues to consider, it is important to review your life and disability insurance, especially if you have been covered by an ex-spouse’s employer plan. It may make sense to think about your specific insurance needs.
Read Also: Can I Start A 401k For My Child
How Is My 401k Divided In A Divorce
Your divorce order must specify division. In your final divorce order, the court must specifically state that your 401 a marital asset subject to division. Sometimes, all funds in the account will be split. But if you paid into your 401 before marriage, the court may decide that only a portion of your retirement account should be divided.
Is It Possible To Split A 401k In Divorce
On Behalf of JerriLynn Hadley PLLC | Jan 26, 2021 | Divorce |
A 401 account is a leading way that people save for retirement in Florida. In a high-asset divorce, the funds in a 401 may be significant. These funds are divisible as part of the marital assets. In order for each party to receive an equitable division of the assets, its important for them to understand how its possible to split a 401 in divorce.
Don’t Miss: What Age Can I Withdraw From 401k
Understanding How Money Is Split Between Divorce Parties
Retirement accounts are usually shared by both parties and is divisible by both spouses. Although these accounts should be split equitably, the judge takes into consideration a list of factors, which you can find in a worksheet on our website under Who Gets What? Our attorneys are familiar with the formulas used to divide requirement accounts and can help make sure you acquire what you are owed.
How are retirement accounts divided? The reality is that they belong to both of you because all of it is thrown into the basket and all of it is divisible when you divide marital property.
In Massachusetts,property division is done equitably. That doesnt necessarily mean equally. You might want to assume 50/50 as a starting point, but judges apply a list of factors. Youll see it on our website on a worksheet thats called Who Gets What? and they apply these factors and then decide how to split the marital estate. When it comes to retirement accounts, the courts will sign off on a QDRO. Thats the Qualified Domestic Relations Order, which prevents the spouses from any tax ramifications as long as they dont go and spend the money.
For pensions, you divide the number of months the pensioner was employed during the marriage and prior to filing by the total of credit earned toward the pension as of the date benefits begin, times a half–thats going to get you the alternate payees portion.
We Know Family Law
How Our Firm Can Help with Divorce
The Miller Law Group, P.C. Team
How Is A 401 Split In A Divorce
Splitting a 401 can be a complex process. During divorce, the court must divide all marital assets between you and your spouse. Some assets are easier to divide than others. Dividing a 401 is an important part of divorce. But it comes with potential tax penalties. Making sure you understand how to complete this process can help you save time and money during your divorce.
Also Check: Can I Invest My 401k In Gold
Handling Divorce And Retirement In Northern Virginia
Having the courts and IRA and/or qualified plan custodians recognize your divisions as QDROs or transfers incident to divorce is crucial. This eliminates tax consequences for you and your ex-spouse. However, lack of attention to detail can complicate the divorce process and have expensive consequences. The professionals at Argent Bridge Advisors can help you navigate this process. Contact us today to learn more.
Direct Or Indirect Rollover To An Ira
Your ex spouse can initiate a direct rollover of her proper share of your 401 into a personal IRA. The transfer itself wont trigger any taxes on your part or that of your ex. But if your ex makes a withdrawal before reaching age 59.5, he or she would generally owe a 10% early withdrawal penalty in addition to regular income tax.
Keep in mind, however, that these rules apply to direct rollovers. This means a direct plan-to-plan rollover. So, your ex may want to open an IRA before the plan administrator approves the QDRO. One can easily open an IRA at most banks and investment firms.
With an indirect rollover, however, the plan administrator sends a check to your ex in the amount of his or her proper share. Your ex then generally has 60 days to deposit the funds in another plan without facing some serious tax penalties.
Don’t Miss: How Does 401k Work If You Quit
Dividing A Qualified Plan
Qualified plans have protection from seizure or attachment by creditors and lawsuits, but divorce is one of the few exceptions. Divorce and separation decrees allow the attachment of qualified plan assets by the ex-spouse of the plan owner if the spouse uses a QDRO. This decree divides the plan assets between the owner and their current or ex-spouse, or children or other dependents.
This is a tax-free transaction if it is reported correctly to the courts and the IRA custodians. The receiving spouse can roll QDRO assets into their own qualified plan or into a traditional or Roth IRA.
How Are Retirement Accounts Handled In Divorce
Retirement accounts are treated as marital assets in divorce and must be divided in an appropriate way as part of the settlement process.
On the surface, this sounds simple enough, but there are several rules, laws and procedures that must be followed so that the division is done properly.
Some of the important elements that impact how funds are divided include when the asset started to accrue, what type of retirement asset it is, and what the marital cut-off date is so that a proper value on the account can be established.
There are two types of retirement accounts:
A defined contribution plan is also referred to as a savings plan.
These types of retirement accounts are characterized by the employee, the employer, or both making contributions to a retirement account in the name of the employee.
The most common of these is a 401 plan, although other defined contribution plans include 403, 457, IRA, Profit Sharing Plan, etc.
A defined benefit plan is a company retirement plan, such as a pension, that pays a benefit that is based on an employees years of service to a company and their salary history.
Defined benefit plans start paying monthly benefits when an employee retires. Those payments will continue for the rest of the employees life and may include survivor benefits.
To divide a retirement asset, the first thing that should happen is that a value must be placed on the asset.
In community property states, that split will be 50/50.
Read Also: Can You Contribute To 401k And Roth Ira
Is My Ex Entitled To My 401k In A Divorce In California
If you are preparing for a divorce in California, you doubtless have concerns over your financial assets, including savings accounts and 401K plans that you have worked hard to earn. You will need to learn Californias property division laws to understand what will happen to your 401K plan after a divorce. You may also need assistance from an attorney to protect your marital assets, including your retirement savings.
Defer Payments Until Account Owner Retires
If your plan administrator allows it, your ex can leave his or her share invested in the plan and wait until you retire to begin taking distributions. This might make sense if your ex is younger than 59.5 and doesnt immediately need the funds. However, he or she would need to start taking required minimum distributions upon reaching age 70.5.
You May Like: Can I Use My 401k To Buy Investment Property
Dividing Other Retirement Accounts
If you have a qualified retirement plan, such as a 401, it will have to be split per the terms of a qualified domestic relations order . The QDRO specifies that a transfer is taking place as part of a divorce settlement and that it shouldnt be treated as a traditional withdrawal.
However, if you choose to use the funds after they reach their final destination, you could, again, be subject to an early withdrawal penalty and income taxes. It may be a good idea to consult with a financial adviser who may help you decide what to do with any retirement funds obtained in a divorce settlement.
A legal professional may help you obtain a significant share of joint assets in a final divorce settlement. These assets may include a portion of a retirement account or any other property that was acquired during the course of a marriage. A divorce may be finalized through mediation or a formal trial.
