Retirement Benefits Are Frequently One of the Most Significant Asset A Divorcing Couple Owns. We Can Help You Understand the Range of Options You Have & the Potential Consequences for Those Choices.
The division of retirement accounts and interests at the time of a divorce frequently involves careful consideration of tax consequences, accurate valuations of accounts and interests, and a divorcing party’s preference for the type and mix of assets they receive in the division of property. There are many ways to creatively divide retirement accounts, some of which can actually free up cash after divorce but before retirement. Here are some general examples:
Defined Benefits Plans
Defined benefit plans are retirement assets such as pensions, where the spouse whose name is on the plan gets a fixed sum each month at retirement, not unlike social security, until their death. If the other spouse is granted a portion of this pension at divorce, the parties may want to value the 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. Alternatively, the courts can often 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 account balance, with consideration for taxes that will be paid on distributions at retirement, are the value of the plan for purposes of the divorce. For example, if the account balance is $200,000, we apply a 20% reduction for state and federal taxes the plan participant will pay when withdrawals are made, making the value of the account $160,000 for the division of property in the divorce.
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.
If you work for the City or County of Milwaukee, they are one of the few entities that will not accept QDROs. Alternatives exist that you can discuss with your attorney.
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