The splitting of pension and retirement accounts during divorce can add to the stress and frustration already evident during the process. Yet, it is in everyone’s best interest that the process is undertaken thoroughly and with care, making certain that all parties involved receive a fair distribution of the assets developed over their married lives together. Alongside the obvious elements such as savings and physical property, it’s vital to remember that 401Ks and other retirement finances can make up a significant part of the finances that have been accumulated.
Understanding how to split pension and retirement accounts during divorce can feel a little overwhelming. However, with a little know-how and assistance, it doesn’t need to add significantly to your stress load. Let’s take a closer look at what you need to consider and what practical steps can assist you along the way to achieving an equitable division of assets in this area.
Tips on Splitting Pension and Retirement Accounts During Divorce
Undertake an Audit
The first thing you need to do is get a good idea as to the extent of your retirement assets. This means thoroughly investigating exactly what the true current and future value of these are. With normal savings and investments, this is relatively easy. There may also have come a time where you or your spouse thought “how much life insurance do I need?”, and took out a cash value policy, which just needs to be dissolved and divided equally between you. Pensions and retirement accounts need a little more auditing work, though.
Your examination should include:
Ascertaining Number and Type of Accounts
You are likely to have more than one pension or retirement account, especially if both you and your former spouse are working. At the most basic level, you’ll each probably have employer-contributed 401Ks. Perhaps if one of you is self-employed there will be a solo 401K to consider. There may also be Simple IRA (Individual Retirement Arrangements) plans that you or your spouse might not have directly contributed to, but still have accumulated value over the time you’ve been together. If one of you is working for a large corporation, it’s also important to understand whether there is a profit-sharing plan (PSP) that has accumulated over your marriage. Make a note of each of these plans along with the companies that facilitate them and the account numbers assigned.
Gather Proof of Contributions
In the majority of cases, divisions will be made on the basis of contributions and accumulation during the time that you and your former spouse were married. Contributions made prior and afterward (although there may be some consideration for alimony in the latter) do not generally form the basis of your settlement. Therefore you should be gathering evidence — payslips, bank transfer proof, statements — that show the dates and amounts contributed to each pension or retirement account so that divisions can be calculated accurately.
There are various reasons why couples choose not to get other parties involved with their divorce proceedings. Particularly if you have a good relationship with your former spouse and are undergoing an amicable divorce, it can be tempting not to involve professionals to avoid souring the process. However, the issues regarding splitting pensions and retirement accounts during divorce can be logistically quite complex. Seeking out guidance from an expert is not indicative of a lack of trust in your former partner, but it ensures both of you are fairly financially supported.
Professionals you may find useful to seek guidance from include:
Your lawyer isn’t just there to argue your case in front of a court. They are an expert in all the potential hurdles you might come across, including those you may not expect. If you are a non-earning spouse, a lawyer can help you consider assets that can impact your future stability. In some states, divorce for men requires an attorney who can help you navigate a system that is often unfairly biased toward your spouse. They will also help you correctly assess the percentage of the retirement plan that should be divided based upon contributions within the timeline of the marriage.
Perhaps most importantly, from a practical, level an attorney can prepare all the legal contracts, documentation, and transfer plans. This includes the arrangement of QDROs (Qualified Domestic Relations Orders) that ensure that pension and retirement plans that are not IRAs are split correctly and transferred to the receiving spouse. Their expertise on these matters will also make certain that no assets or legal considerations slip through the cracks in a way that may come back to bite you later.
Accountant or Tax Expert
Tax now and in the future can be a sticky subject when it comes to pension and retirement aspects of divorce settlements. In the majority of cases, you will not be expected to pay taxes on assets that are transferred to you as the result of a divorce. However, there are elements that can complicate matters. An accountant can guide you through how to file your IRA division with the custodian correctly, to avoid any tax penalties.
If your personal financial situation — if you are not working, for example — means you might have to withdraw from your portion of IRAs or 401Ks before retirement, an accountant can help you understand what your tax obligations will be. Similarly, if you are transferring part of your IRA or other retirement savings to your former spouse, your accountant can talk you through labeling this correctly to avoid taxes and early withdrawal penalties.
Understanding pension and retirement accounts during divorce may not always be your first consideration when dividing your assets. However, they do represent value that was accumulated during the marriage and form an important part of your future stability. Be sure to take a thorough audit of your retirement assets to gain a clear understanding of their extent. Where appropriate, consult experts who not only handle the practical elements of division, but provide you with the knowledge to ensure you act correctly and avoid penalties in this area.
John DeGirolamo is a dedicated and passionate divorce trial attorney. This means that he’s not simply an expert in the theory of family law, but also in wielding that knowledge to make a serious impact for Tampa men in a courtroom environment. www.inlawwetrust.com