How are Retirement Accounts Handled in Divorce?
Part of the process of divorce is looking forward to a new future. However, it may be stressful to think about that future when you are unsure of how your retirement assets will be divided.
Retirement benefits include pension plans, profit sharing plans, IRA accounts, and other assets that people accumulate through a lifetime of working and saving.
Texas is a community property state. This means that any contributions to a retirement plan while the spouses are married are considered community property. Community property is typically divided 50/50 between the two spouses.
The hard problems in divorce retirement cases are valuing the retirement benefits and determining the manner of the division.
Most retirement benefits can’t be divided until they have vested and the benefits typically don’t vest until the worker has worked at a company for a specific number of years.
Ways to Divide Retirement Plans
There are several ways to divide pension plans. Two common ways are:
Reservation of Jurisdiction
Here the retirement plan is divided when the spouse who earned the benefits is first eligible to take the retirement benefits.
For example, if the couple divorces when the husband is 55 but the benefits aren’t available until the husband is 65, then neither couple gets anything until the husband is 65.
If the spouses were married for 20 years at the time of the divorce and the retirement plan didn’t start until after the couple was married, then the wife gets 50 percent of 2/3 of the retirement plan. 2/3 because the couple was married for 20 years and the plan took 30 years to vest.
A Cash Buy-out
Here, an actuary or financial expert determines the present-day value of the retirement plan.
The spouse with the retirement plan then pays the other spouse ½ of the present value in return for the right to take the full retirement plan later in life.
Retirement plans have many complex issues. Some plans can’t be distributed to a spouse. Sometimes, the spouse doesn’t want to take the benefits at the earliest possible date to maximize the amount of the benefits.
The complexities are handled through a formal order called a Qualified Domestic Relations Order or QDRO. QDROs are handled by private companies who charge a fee for handling the account.
In divorce cases, a marital settlement agreement is used to handle the distribution of non-retirement assets and assets that don’t require a QDRO.
The agreement then incorporates the QDRO so that the retirement benefits can be divided at the appropriate time by the administrator of the retirement plan. The former spouses can then usually choose to take monthly payouts which may have tax advantages or a lump sum payment.
QDROs are generally needed for pension plans, profit-sharing plans, 401k plans, 403b plans, 457 plans, employee stock ownership plans, some tax-savings annuities, and thrift plans. IRAs, deferred annuities and some other plans generally don’t require a QDRO.
Call Scott M. Brown & Associates Today
Valuing and distributing retirement benefits is extremely complex. Different experts often differ on the value of the benefits. There are many legal, financial, and practical issues that must be considered.
To get a 1-on-1 consultation with an experienced Texas family lawyer, please call Scott M. Brown & Associates at 979-849-8526 or contact us online.