How Are Retirement Benefits Divided in a Divorce?

 Posted on April 07, 2023 in Divorce

Divorce can be a complex and emotionally charged process, particularly when it comes to dividing assets. Retirement benefits are often a significant part of a couple's financial planning, and they are just one of many important factors to consider during a divorce. It is important for divorcing spouses to understand the various types of retirement benefits they may need to address, how these assets may be divided, and what factors are involved in the process.

Types of Retirement Benefits

There are several different types of assets that spouses may rely on to provide for their financial needs when they retire in the future. Each of these assets may be treated differently during a divorce. Here are some common types of retirement benefits:

• Defined contribution plans - These plans are funded by an employee, usually by deducting a certain amount from their income and depositing these funds into a retirement account. A person's employer may also make contributions on the employee's behalf, such as by matching a certain percentage of the amounts deposited into an account. Examples of these types of plans include 401(k) accounts, Thrift Savings Plans, and individual retirement accounts (IRAs).
• Defined benefit plans - These plans provide a guaranteed benefit to employees upon retirement. The amount a person will receive will usually be based on a formula that takes into account factors such as their average salary and their years of service. Examples of these types of benefits include pensions and annuities.
• Military retirement benefits - People who have served in the U.S. military, including active-duty servicemembers, retirees, and veterans, may be eligible for benefits that will provide them with income after they retire.

Dividing Retirement Benefits Between Divorcing Spouses

If retirement benefits were earned or if contributions were made to retirement savings accounts during a couple's marriage, these assets will be considered marital property that will need to be divided between spouses during the divorce process. In many cases, spouses are able to negotiate agreements in which the funds in retirement accounts will be divided fairly along with other marital assets. Funds may need to be transferred from one account to another during this process.

When transferring or withdrawing funds from retirement accounts, couples will usually need to use Qualified Domestic Relations Orders (QDROs). These court orders will specify the amount that should be paid to an alternate payee (someone other than the account holder), and they will be provided to the administrator of a retirement plan. This will allow funds to be withdrawn before retirement age without taxes or penalties being applied. QDROs can be used for accounts such as 401Ks, and for IRAs, a "transfer incident to divorce" may allow funds to be withdrawn and transferred to the other spouse.

Dividing pension benefits or other defined benefit plans may be a more complicated process, especially when spouses do not know the amount that the pension holder will receive after they retire. In many cases, the non-pension-holder spouse will be entitled to receive a certain percentage of the pension holder's benefits. In these situations, a QDRO will be used to specify the amount that the pension plan administrator will pay to an alternate payee.

Contact Our Cook County Retirement Asset Division Lawyers

Dividing retirement benefits during a divorce can be a complex process. However, by knowing what types of retirement benefits you and your spouse own and what methods of division are available, you can work with a Denton County property division attorney to create a fair and equitable settlement that protects your financial future. Contact our office today by calling 940-382-1976 to schedule a free consultation.

Sources:

https://www.investopedia.com/articles/investing/072915/how-protect-your-retirement-after-divorce.asp

https://www.schwab.com/learn/story/divorce-after-50-impact-on-retirement-savings

https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf