HOW IS RETIREMENT DIVIDED DURING DIVORCE?
Often the simplest step determines if part of a Retirement Plan is marital property and therefore eligible for division. From there, a lot of math comes in to play to determine how an account may be divided.
However, questions arise when a case isn’t quite so simple. What happens when one spouse already has a Retirement Account at the time of marriage? How exactly do you come up with how much of that fund is, by definition, marital?
The answer to that question can be very complicated based on the facts. You need to collect as many old statements as possible, contact the Retirement Plan, etc.
You can also use a Coverture Fraction to determine what is marital and what is separate. The Coverture Fraction aids attorneys and the Court in determining that very answer. First, you divide the time the spouse both worked and contributed to the fund by the total time the spouse has had that plan. Second, you multiply that number by the value of the account.
So far, so good. However, as we’ve already seen, not all plans are simple. Even with a standard 401(k), simply withdrawing the appropriate amount to transfer it creates a huge tax issue. To divide funds in a tax-free manner, you must understand the laws and all the options of distribution
- Determine the earliest possible retirement date;
- Establish the life expectancy at separation to ascertain how much time the employee-spouse would receive the benefits;
- Calculate the value of the Defined Benefit Plan at the earliest time the spouse could retire;
- Once the future value has been determined, discount that value to the separation date; and
- Calculate any potential contingencies and further discount the value
Clearly, much of the work involved with this process requires you to hire an expert to give his or her opinion.
Some tips to remember:
- IRA funds should be transferred directly to the spouse, not withdrawn and then paid;
- If the spouse who gets a portion of the IRA does not already have an IRA account set up, he or she will need to do so; and
- Funds transferred into a non-IRA account may be taxed.
- Completed and filed QDRO;
- Signed by a Judge; and
- Instructions to the Plan’s administrator on how to dispersing the funds.
Repercussions of not following these legal steps include:
- A higher tax bracket for the spouse withdrawing the funds;
- Surtaxes on other investments; and
- Loss of potential eligible exemptions.
To obtain a QDRO does not happen immediately. It takes extra time and increased legal fees. Usually, the spouse receiving the funds will pay these extra legal fees to his or her lawyer who handles all the paperwork.
Some spouses elect to receive another compensation comparable to the funds instead to avoid additional legal fees. This can come from other monetary accounts or in the form of additional marital assets.
The spouse may still receive the benefits of the retirement plan even without meeting that “10/10 requirement,” but he or she will not receive the payment directly from the DFAS.
For this type of fund, the distribution may be set forth in a court order such as a divorce decree or separation agreement. The former spouse will have to submit an application in adherence to the Uniformed Services Former Spouses Protection Act (USFSPA) guidelines. The spouse will need the following items:
- A completed application;
- A copy of the court order certified by the clerk of court; and
- A completed DD Form 2293.
The spouse may receive the appropriate amount through other divisible and comparable means or through an agreement which will transfer payment in the future, typically at the employee-spouse’s retirement. However, issues can arise with taxation of such payments and with calculation of the appropriate amount.
A spouse wishing to receive the appropriate portion of such a fund must express that desire prior to the divorce settlement.