How Retirement Accounts are Divided during a Divorce
Retirement accounts are considered marital property and therefore split equally between the divorcing parties. The most common accounts are divided as follows:
- IRAs – Divided with the process “transfer incident to divorce”
- 401(k) – Divided using a “Qualified Domestic Relations Order” (QDRO)
- 403(b) – Also known as pensions use a QDRO
This holds true unless a retirement account was established prior to the marriage and marital income was not contributed to the the account during the time of the marriage. If this is true the retirement account could be considered separate property and not subject to property division.
When couples separate in Wisconsin, the accumulated value of the retirement assets is considered marital property to be divided. Other than the house, this is likely the largest or second largest asset to divide.
There are three major types of retirement benefits that need to be considered when a divorce occurs; defined benefit (pension) plans, contribution (401 K) plans, and social security benefits.
Dividing Pension Plans
A defined benefit plan or pension plan is something an employer offers an employee without the input of the employee. It is something an employee will get without any contribution. For the most part, defined benefit plans have disappeared unless you work for the government or you are an executive of a larger corporation.
The first step in dealing with this type of asset in a divorce is valuing the pension plan. This is not an easy task and typically requires the hire of an actuary. 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 nonemployee spouse is entitled
Decide How to Split the Pension
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 nonemployee spouse. What this means is forgoing other assets 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. This 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.
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.
Splitting 401k Plans
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. Determining the value may still require an actuary, but it is not required as heavily as it is required for pension plans.
After the value of the contribution plan is determined, the divorcing party deciding on the method of splitting the asset is the next step. The same options for splitting pension plan 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.
Securities & Investments
Stocks, bonds, mutual funds, and commodity accounts are another set of retirement accounts that need to be divided. This can be difficult as the value of these assets can significantly fluctuate.
There are two ways to efficiently divide securities and investments. First, each asset is assigned a value on the date of the separation. This can be risky. Agreeing to this ‘assigned value' may help, but it may hurt. There is a high likelihood the value of these assets will be changed when the time comes to actually distribute the asset in the final divorce decree. The method of ‘assigned value' is typically used when the securities and investments are traded for something else of equal value.
Another method of distributing securities and investments is actually dividing the accounts. For example, a stock trading account would be divided into equal portions. This is more straightforward but can involve more work as well as trading costs.
Dealing with Social Security Benefits
Yes, social security benefits are considered marital property in some instances. 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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