How to Divide Retirement Accounts During a Divorce in Wisconsin
Retirement accounts are considered marital property and therefore split equally between the divorcing parties. As explained in Wis. Stat. Section 767.61, Wisconsin is one of 9 states that are labeled community property states, which means that everything that is owned by a married couple is subject to a 50/50 split in the event of divorce.
Types of Retirement Plans to Divide
There are three major types of retirement plans that need to be considered when a divorce occurs; defined benefit plans, defined contribution (401 K) plans, and social security benefits.
Defined Contribution Plans – 401(k) & 403(b)
These retirement plans require employees to contribute a fixed portion of their paycheck.
- 401(k) plans
These are employer-sponsored retirement accounts that dedicate a portion of the employees pre-tax salary to a retirement account
- 403(b) and TSA plans
A 403(b) is an example of a tax-sheltered annuity (TSA) plan. They allow certain employees of public schools and tax-exempt organizations to save for retirement through contributions from both employers and employees.
- IRAs (IRA, Roth IRA, and SEP plans)
IRA’s, Roth IRAs, and SEP IRA’s are three types of similar retirement accounts. Traditional IRA’s allow employees to pre-tax their income, which allows for an upfront tax break. Roth IRA’s work in reverse, meaning the employee will not receive any upfront tax deductions, instead they will receive a tax break later meaning any money withdrawn will be tax-free. SEP (Simplified Employee Pension) Plans allow self-employed individuals to provide a basic retirement plan for themselves and any of their employees. Like the traditional IRA, employers can take a tax deduction for their contributions to an SEP IRA.
- 401(k) plans
Defined Benefit Pension Plans
Defined benefit plans, or pension plans, are employer-sponsored retirement plans. The employer agrees to a specified payment on retirement that is calculated using a formula that considers multiple factors, such as your salary history and length of employment.
- Wisconsin Retirement System
The Wisconsin Retirement system (WRS) is a hybrid defined benefit plan that contains both a defined contribution plan (401(k)) and a defined benefit plan. This means that it includes both an Employee account and an employer account.
- Wisconsin Retirement System
Social Security Benefits
In some instances, social security benefits are considered marital property. In Wisconsin, if a marriage lasts longer than 10 years, both spouses are entitled to social security. Collection on a spouse's social security benefit can begin at age 62. This will remain true until either party gets remarried.
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Methods of Division
When dividing retirement accounts, there are two common ways to divide the assets in a way that guarantees both spouses receive an equal portion of the marital assets involved.
Important Note: Before any division can take place, the retirement accounts of both spouses must first be appraised to determine the present value of the account, and what percentage can be classified as “Marital”. This requires the work of an actuary, or a financial professional who can provide guidance as to how the accounts should be valued.
Trading marital property for retirement assets is a very common method of division in divorce. For example, if the retirement account is valued at $100K, and the family home has $100k in equity, one spouse could keep the full retirement account and the other spouse could keep the family home. This would be an example of an equal trade of assets.
Splitting marital property and retirement assets is another solution. Typically at the end of a divorce, parties with multiple 401(k) accounts will use a QDRO to equalize retirement accounts. An example of this would be one spouse has $250k in a retirement account while the other spouse has $50k in a retirement account. In this scenario the spouse with $250k in their account would draw down their 401(k) via a QDRO transferring $100k to the other spouse to equalize the retirement account values. The QDRO is a legal procedure used to divide retirement accounts without penalties. Read more about QDROs below.
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Building a Property Division Plan
When building a property division plan, it is easier to work with your spouse to prioritize finances, debt, and property rather than letting the courts decide(3). To build a property division plan, you must:
1. Create a List of Assets
The easiest way to start is with each spouse creating a list of assets and identifying which spouse should receive the asset once the divorce is finalized. It is natural to have disputes at this stage, but the best results come from working together to find a solution to determine who should get the property.
Transparency is crucial when identifying assets such as retirement accounts, pensions, real estate, bank accounts, insurance policies, vehicles, and anything additional that holds value. If one spouse fails to disclose an asset, whether or not it is intentional, the judge may reopen that case and there may be penalties associated with failing to disclose.
2. Value the Property
The next step is to determine what the property is worth. The fair market value for each item is generally accepted by the court. Fair market value is understood to be what you can get for the item on the open market today, not what you had originally paid for it. There are many resources that can be used to determine asset worth.
3. Determine Marital or Separate Property
Since Wisconsin is a community property state, any asset that is claimed to be separate will need to be proven to a judge by showing the date it was purchased, how it was paid for, and how the property was kept separate during the course of the marriage.
4. Determine Marital Debt
Debt is also included in property division during a divorce. Joint debt will be split evenly between spouses. Individual debt, if not used for marital purposes, will be the responsibility of the owing spouse.
5. Create a Property Settlement Agreement
If both spouses can agree on all aspects of the property and debt division, a property agreement must be created and presented to the judge. This agreement should list each asset and debt, the value, and the owner. If you have any reservations on the result of the property division, consult an attorney before the agreement is signed.
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Start Dividing Property & DebtsGet your WI property division worksheet here. Document property, assets, and debts. Think through how you want to equalize your property division, and avoid a lengthy battle in court.
When going through the process of property retirement account division, there are a few things to keep in mind:
How 401(k)s are Divided and Valued
The majority of married couples will need to split a 401k, either one joint 401k plan or multiple 401k plans. Splitting a 401k is much easier as a present-day value clearly exists, however it will still require the use of an actuary. When valuing a defined contribution plan, all you need is the current balance of the account. What is important is the date on which the valuation takes place because defined contribution plans can fluctuate dramatically.
After the value of the contribution plan is determined, the divorcing party needs to decide on the method of splitting the asset. The same options for splitting pension plans exist when splitting contribution plans. The preferred method is splitting the asset now, into separate 401k accounts.
In some cases, separating the asset will require a QDRO, as described above, before the 401k will roll over. Other times a copy of the divorce paperwork is all that is required. This is situational based on the 401k plans.
How Pensions are Divided and Valued
The first step in dealing with the division of pension assets in a divorce is valuing the pension plan. This is not an easy task and typically requires an actuary. When valuing a defined benefit pension plan, an appraiser can determine the present day value of the account, in which case the ex-spouse would receive a cash settlement.
Another option would be to defer the division, which would imply that no present value is determined, and each spouse is given a share of benefits if or when they are paid by the plan. The last option would be Reserved Jurisdiction, where the court retains authority to order distributions at some point in the future.
The actuary will then define three items:
- The value of the monthly pension payments
- The percentage of the benefit to be considered a marital asset
for instance, if your spouse receives a pension, has been employed for 30 years and married for 10 of the thirty years, 33% of the payout should be considered a marital asset.
- Define the amount of the pension the non employee spouse is entitled
After the value of the pension is determined, a decision will need to be made on how to split the asset. There are two options:
- Buyout the Non-Employee Spouse
The most common approach is buying out the non employee spouse. What this means is forgoing other assets and giving them to the other spouse. Some advantages to this approach are keeping your entire pension benefit. However, the risk here is if the value of your pension changes, there is no way to recoup the lost amount.
- Split the Pension at Retirement
Splitting the asset at retirement is the other primary option. This option is less common due to the added complexity. In cases where couples determine they want to divide the pension at retirement additional paperwork and court orders are required. When couples go down this path they need to get a Qualified Domestic Relations Order or QDRO.
Separate property is property that belongs to just one of the spouses in a marriage and is not subject to division. The following are examples of cases that could be considered separate property:
As long as the gift has not been commingled in the marriage and was explicitly for one party in the marriage, this could be considered separate property (6). For instance, a gift cannot be deposited into a joint bank account, paid for or maintained by a joint bank account, or used to make payments on any marital debt. To ensure that money or property is deemed as separate, you will need to be able to provide proof to the court that the gift has never been commingled in the marriage, and should be excluded.
This is treated as belonging to the person who received the inheritance and cannot be divided between parties as long as the inheritance monies have not been commingled with marital assets. Examples of commingling here include a joint bank account where marital monies are deposited or real estate where marital monies were used for maintenance/improvements on the property. In this instance as well, you will need to be able to provide proof that the inheritance has never been commingled in the marriage. Upon receiving an inheritance, documentation should be obtained from the estate of the deceased that shows specifically what you inherited. This should be put into a completely separate bank account that will never receive marital funds, and this inheritance cannot be used to pay on marital debt.
Property Brought into the Marriage
As long as the property has been kept separate during the course of the marriage and has not been paid for/maintained/improved upon with marital funds, this could be kept separate. If you have been married for a long time, do not expect to receive any marital property that you brought into the marriage. The longer your marriage, the more likely the court is to see any property brought into the marriage as irrelevant. Cases like this are more likely to see marital property as all-inclusive.
Technical Terms You Should Know
During the course of asset division, there are a couple terms that, while they are mainly used by attorneys, are still important to be aware of. These will come into play when splitting retirement and pension accounts.
Transfer Incident to Divorce
Accounts known as IRA’s are divided using a “Transfer incident to divorce” (1). This specifies that the original owner of the IRA can direct all or part of the IRA account to their ex-spouse’s IRA. If the owner decided to fully transfer the funds of the account, this can be done by re-titling the original IRA. If only a partial transfer is in order, the owner may direct the custodian to transfer a portion of the account to an existing or brand-new IRA in the receiving spouse's name. This transfer can take place using shares of holdings or in cash.
Qualified Domestic Relations Order (QDRO)
Accounts known as 403(b)s and qualified plans such as 401(k)s are split using a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that will direct the retirement distribution to be split in the future based on an agreed upon percentage or judge order (2). This can be done without any tax consequences, as long as it relates to a divorce.
Frequently Asked Questions
Is my retirement fund still mine?
Retirement funds are included in the division of marital property. Depending on your situation, your spouse may receive all, none, or a portion of your retirement account.
Does retirement account interest get split in divorce?
Any funds brought into the marriage are subject to division. Interest is considered income attributable to your retirement fund and is considered marital.
Do I need to disclose all my assets to my spouse?
In Wisconsin, you and your spouse will be asked to fill out a financial disclosure form. On it, you must list all assets that you own which are worth more than $500.
When do prenups expire?
If there is no clause or specific stipulation regarding the length of the prenup, there is no expiration date for the lifespan of the prenup. However, the older a prenup the less impact it will have on the division of property at the time of divorce especially if at the time of the prenup the financial circumstances were substantially different.
What is the official retirement age?
The minimum retirement age in Wisconsin is 55, but the normal retirement age is 65. Unless you have a disability, the oldest that you can draw out social security benefits is 62.
Do retirement accounts get split in divorce?
Yes, all retirement accounts are considered marital property and are subject to division.
How is property divided in a divorce in Wisconsin?
As a community property state, all marital property is subject to a 50/50 split.
Is a spouse entitled to the 401(K) in divorce in Wisconsin?
A 401(K) is considered marital property. However if you have enough assets that are equal in value to your retirement account, You and your spouse could arrange an exchange of the assets for your full retirement account.
What assets are safe from divorce?
The only assets that are safe from divorce are those received as a gift, the result of an inheritance, or property that was owned prior to the marriage.
Do I get half of my spouse’s 401(k) in a divorce?
Spouses do have a legal right to the 401(k) of their former spouse, however there are many arrangements that can be made that could be agreeable to both parties.