Unless there is a prenuptial or postnuptial or divorce agreement that provides otherwise, retirement accounts will be allocated between the spouses in a divorce. Even if a retirement account is titled in the name of one spouse, or is an employer-sponsored plan, there are still ways to either divide the plan between the parties or to use other assets to offset it in equitable distribution.
Determine What Type Of Retirement Account Do You Have.
Retirement plans are either qualified or non-qualified. The most common types of qualified retirement accounts are 401(k)s, 403(b)s, SEP-IRAs, profit-sharing plans, and certain pension plans. A qualified retirement plan is one that meets guidelines issued by the Employee Retirement Income Security Act (ERISA) regarding participation, vesting, benefit accrual, and fund information. When a retirement plan meets ERISA guidelines, it is considered a “qualified” plan and is eligible for certain tax benefits.
Non-qualified retirement plans include certain IRAs, deferred compensation plans, executive bonus plans, and annuities.
When you are getting divorced, it is important to know whether a retirement account is a qualified plan or a non-qualified plan in order to determine whether it is divisible via a Qualified Domestic Relations Order. If your plan documents do not specifically state whether the account is qualified, you will have to check with the plan administrator.
What Is A Qualified Domestic Relations Order (QDRO)?
A Qualified Domestic Relations Order (QDRO) is a Court Order that instructs a retirement plan administrator how to divide a retirement account between parties. If a retirement account is a qualified plan and can be divided by QDRO, the retirement account is capable of being separated between the parties without penalty. This is preferable because the non-employee spouse’s share can be deposited into a separate account, allowing for each party to manage his or her portion of the retirement funds individually.
Most divorce decrees will set forth the specific division of the retirement account that is agreed upon by the parties (or ordered by a Judge after a divorce trial), and provide for the parties to jointly hire an individual whose expertise is in the drafting of QDROs to prepare the QDRO and submit it to the Court for approval. Once approved by the Judge, the QDRO will be sent to the retirement plan administrator to effectuate the division of the account.
How Do We Divide A 401(k)?
As a qualified plan, a 401(k) is capable of being divided between spouses by QDRO. Accordingly, you and your spouse can either agree to divide the account by percentage or by dollar amount.
How Do We Divide An IRA?
IRAs can typically be divided using a process known as a “transfer incident to divorce.” Also called an IRA “rollover,” this process does not require a separate court order and can be accomplished by the parties themselves without the need to hire a specialized lawyer. Like a QDRO, an IRA rollover transaction is not subject to taxes. Instead, each party is responsible for payment of taxes and any penalty on the distributions from the retirement account after the funds are divided between them. As with a 401(k), the account can be divided by percentage or amount.
How Do We Divide A Pension?
When you have a non-qualified pension or other deferred compensation that is not divisible by QDRO or rollover, you will need to be more creative in allocating the asset between the parties. Typically, this means negotiating a buy-out of one party’s equitable interest or a sharing of the distributions if, as, and when the employee spouse receives them.
The attorneys at Broder & Orland LLC are experienced with the intricacies of dividing all types of retirement accounts and can help you take the appropriate legal steps to protect your rights to retirement accounts in your divorce.