Division of Retirement BenefitsRetirement Benefits Can Be the Most Significant Assets A Divorcing Couple Owns, and We Can Help Represent You in the Settlement
When a divorce is before the court, the judge must make orders dividing all marital assets, including retirement accounts. When the only significant assets are a house and retirement accounts, it can be challenging to make the division equitable and fair to both parties. However, there are many ways of creatively dividing retirement accounts, some of which can actually free up cash to ease the time after divorce but before retirement. Here are some general examples:
Defined Benefit Plans
Defined benefit plans are retirement assets that we generally think of as pensions, where the spouse whose name is on the plan gets a fixed sum each month at retirement, not unlike social security. If the other spouse is granted a portion of this pension at divorce, the parties may want to value that interest in today’s dollars and give the spouse an equivalent amount in another asset, such as the interest in the house or another retirement account, such as a 401k. However, the courts can also award an interest in that defined benefit plan so that at the time of retirement, each spouse gets a portion of the monthly payment. This is done through a court order called a Qualified Domestic Relations Order, or QDRO. Each party will then pay his/her own taxes on the monthly amount he/she receives.
Defined Contribution Plans
“Defined contribution plans” are plans such as 401k, 403b or IRA accounts. The amount in the account, with an increase or decrease in value due to market conditions, is the total sum of the plan. At retirement, you can take out as much as you want when you want but once it is gone, it is gone. For plans qualified under federal law, such as 401k or 403b, the spouse whose name is on the account is the participant and the spouse whose name is not on the account is the alternate payee. An alternate payee can get a portion of the retirement account by QDRO without the participant having to pay taxes on that money distributed. The taxes at retirement are passed on to the alternate payee. In addition, most qualified plans provide an option to the alternate payee, not otherwise available to the participant, to take part or all of the money before retirement at the time of transfer from one spouse to the other, paying taxes at present tax rates but not paying any penalty. This money can then be used to pay joint bills or provide a down payment on a house.
Discuss Your Specifics with our Family Law Attorneys
There are many more examples of creative ways to divide pensions at divorce, but it must be done carefully and in compliance with regulations governing pensions. If you have any questions about your retirement benefit please contact Attorneys Amy L. Shapiro or Katherine L. Charlton at our Milwaukee office at 414-271-8650, Attorney Lynn Lodahl at our Madison office at 608-257-0040, or contact us through our website form to set up a consultation.