What Happens to IRAs, 401(k) Plans and Pensions in a Divorce?
Often retirement accounts, especially those which are involuntary or directly deducted from your paycheck, will be your most substantial marital asset other than your marital home. Any retirement benefits which have accrued or vested during the marriage are marital property. As such, they will need to be divided in a divorce. If either spouse has accrued substantial retirement benefits prior to the marriage and that spouse has not yet begun receiving distributions of those benefits, they are likely to be considered non-marital or separate property. The easiest way to avoid the potential argument over this issue is to address it in a prenuptial agreement.
Retirement accounts which will generally be divided in a divorce include traditional pensions (including military and law enforcement pensions), IRAs, Keoghs, Employee Stock Option Plans (ESOPS) and 401(k) plans. There are certain benefits which are not considered marital property. These include railroad retirement benefits, social security benefits, disability compensation and, in some states, teachers’ pension funds.
Two Ways to Divide Retirement Benefits
The first way is a present-day valuation buy-out or asset reallocation. If you are dealing with an IRA or a 401(k), the present-day value is easy to figure out – just look at your statement. A traditional pension is substantially more difficult to figure out. In the case of a pension, you are guaranteed a particular payment at a particular time – say, for example, $800 a month at age 65. But you’re only 35 now and the $800 guarantee assumes that the fund will have 30 more years of asset growth before it is required to pay out. That $800 per month doesn’t really exist now. It won’t exist for 30 years. Something less than that exists now. So, how do you decide what that benefit is worth today? Generally, an actuary or accountant must be hired to do the necessary calculations to determine the present-day value of the benefit. Once you have the present-day number for the pension, IRA or 401(k), the spouse to whom the account does not belong trades his or her half of that amount for other assets of the same value.
The other way to divide retirement benefits is to divide the existing benefit into two accounts. This can be done in pension plans, IRAs or 401(k)s. To divide an IRA, the brokerage generally just needs a copy of the court’s final decree and your final settlement agreement if you reached one. These documents should include division of the IRA funds. If the court orders the division and the split funds are rolled into a new IRA account by the receiving spouse, the transfer is without penalty and without tax. The division of a pension plan and a 401(k) plan are slightly more complicated.
Qualified Domestic Relations Order (QDRO)
A QDRO is a very detailed legal document, signed by the judge after your divorce is finalized, which will allow the establishment of a separate pension benefit for the receiving spouse in the case of a pension. It will be required to transfer a portion of the retirement funds in a pension plan or 401(k) plan from the plan participant spouse to the other spouse. It allows the rollover of a portion of 401(k) plan funds to an IRA belonging to the receiving spouse in the case of a 401(k). Your lawyer will communicate with the plan administrator regarding specific plan requirements for the acceptance of QDROs. If all requirements are met, the division is accomplished without penalty or tax. It is not treated as any early withdrawal or loan against your benefits. [More about QDRO...]
Differences Between Retirement and Other Accounts
Divorcing spouses should be careful when considering the division of retirement benefits. They are inherently different than other liquid or semi-liquid marital assets because of their purpose (retirement funding) and because of their legal baggage (early withdrawal penalties and taxes). For example, it might not be appropriate to equate $10,000 in a savings account to a $10,000 IRA. The savings account is worth $10,000 if a spouse needs it today. The IRA is worth substantially less if the spouse needs it today, because he or she will ultimately pay tax and penalty on that amount. So, it is easiest, when possible, to compare apples to apples – retirement funds to retirement funds.
Where there are not equal or substantially equal retirement funds to compare and divide, don’t forget the tax and penalty implications when considering your property settlement.
23 Comments
I will be receiving a settlement from my ex husbands 401K. There should be no penalty withdrawing the funds since it is a hardship…correct? Do I have to pay taxes if I do not roll it over?
If you receive a portion of the 401(k) as part of the divorce settlement, you will have a one-time opportunity to withdraw monies without penalty, but you will likely have to pay income tax. Unless you need the cash, it is best to roll over your portion to a 401(k) or IRA in your name.
I am going through this all right now and paperwork has been done for the opers portiaon of the retirement! They are saying I am not aloud to receive any money till my ex wothdrawls money first? Do I have to do a second order for his 401k ect… Or I’d that all compined into one account! I need the money for medical expenses and hardship. What can I do.
If a spouse is drawing a pension from a deceased first husband, in the event of a divorce, is the present spouse entitled to any portion of that pension?
I am 70 yrs of age and have been receiving a distribution from my 401K. The divorce has been granted, however my Ex is appealing the judges decree. I wanted to have the qdro prepared when the judge rendered his decision, but my Attorney says we have to wait until after the appeal.
She is demanding 1/2 of the distribution for 2009 and 2010 and I agree to that. However I want to transfer to her the income tax responsibilites of the distribution.
Does this require a QDRO or by what means do I transfer 1/2 the withholdings and tax responsibility?
I received a QDRO settlement for 1/2 of my ex-husband’s 401K and immediately rolled it over to an IRA. I took an early distribution and have to determine PA state taxability via a “cost recovery” method. It states that it is not taxable until the amount recovered is equal to my contributions. Because this was my ex-husband’s 401k, am I correct to assume that I can not say that “I” contributed and therefore will owe state tax regardless that the amount is way under the amount contributed to the plan?
Without my knowledge my spouse cashed out her 401k and spent it all. The acct was mostly funded during our marriage. We live in a community property state. Wouldn’t the 401k be considered community property? Doesn’t the plan trustee need my signature/approval to liquidate the 401K? I don’t get how the trustee can just hand over all that money without spousal consent. My half is gone can I sue the trustee to get it back?
Any contributions your wife made to the retirement plan during marriage are community property. The retirement plan administrator does not need your consent and/or signature to withdraw from the account unless the administrator has been out on notice that there is a pending dissolution. During a dissolution proceeding, your wife will have to account for the proceeds she withdrew or you will be awarded more of the marital estate to compensate you for your one-half of the amount she withdrew.
My husband is terminally ill and i just found a document of his ira account that had his three children and list as 25% beneficiary. Our pre nup was drawn up that I would receive his and he would receive mine. What can i do about this.
question: I have a 401K and my husband has a Florida Teacher’s Retirement account. How will the division be determined in a divorce?
Do I have to get an Actuary done or is it his responsibility.
In a QDRO there is a formula for determining how much an ex gets from a pension. My husband’s ex wants a portion based on what he earns for his work career. Isn’t she entitled only to a portion of what was earned during the marriage? If the divorce decree doesn’t include the wording “during the marriage” can she alter the wording of te QDRO so that she gets more than just what was earned during the marriage?
My divorce awarded me 1/2 of my ex’s 401K and stock options with the stipulation that I not have them until he turned 59 1/2 he will soon be 60 but I am only 53. Can I take the 401K without penalty or must I roll it into an IRA ? Can I liquidate the stock without penalty to use as a down payment on a house.
I have been legally divorced for almost two years in the state of louisiana and we never did a community property settlement. Is there still time to file for one and divide retirement benefits?
I have a question. My husband and I divorced and in the divorce decree it said that I was entitled to half of his 401 K which I got and half of an IRA we had set up years before. My ex said that he had no paperwork on that IRA so I couldn’t ever collect my half which would have been a nice sum. We started it with $2000 back in 1989. I can’t even remember the bank we set it up at and the lawyers just shrugged their shoulders. Any ideas on how I could locate it?
Married about 20 of 43+ years of my working life. My pension and 401K, 19yrs of married life, are now in an IRA. My husband also has an IRA with pension and 401K money which has already been reduced by his divorce to his first wife (my IRA is almost twice his). So how do I know how much I may have to give him – we also recently sold the house I bought 7years before we got married, I had about 100K invested before I got married. We sold our home and bought a new home. How do I know what I end up with if I get a divorce? PS: He has 2 kids by his prior marriage who owe us about $12,500 and a reduced IRA due to his divorce, I have no kids.
He does not know I am considering divorce!
After being married 171/2 years we got a divorce. Being a homemaker I had no income. My husband has a pension. I know I have to file a QDRO but he is now claiming bankruptcy. Will that affect me filing for QDRO at a later date. Do I need to file it before his bankruptcy is discharged?
My ex husband, provided bad info, and the the QDRO was denied by his retirement plan company. Therefore they did not recogize me as the alternte payee, and distributed 100% of the funds to him. He then transfered it to an IRA account, He is willing to pay me the agreed upon 25% but wants me to pay the taxes? I am told I don’t have to pay taxes because the QDRO was not in effect. Is this true?
My husband and I are getting divorced. I just found out that he took all of his money out of his ira last year so I wouldn’t get anything from the account. I thought that because we were married that he needed my permission to make any kind of withdrawal from the account. I need to know if I should get a lawyer I want to know what my rights are. We were married over 20 years and now he is leaving me for a younger girl. When I questioned the Ira company they said I had no rights to the account because it was in his name. I was only the beneficiary. I was there when the account was opened and was told that we both were needed to make any king of withdrawals. They told me they don’t know what I am talking about. The agent we used is no longer with them.
Please let me know if I do have rights.
I am legally separated in CA. My husband began liquidating the community property IRA after retaining a divorce attorney, but prior to filing for dissolution. After filing for dissolution, before I had notice, and without my consent, he liquidated 100% of what remained in the IRA. The broker is his brother, who had been aware of the dissolution petition and retention of a divorce attorney. Is this an SEC violation, and is there a remedy?
Thank you. I realize I may have some rights in the division of marital property, but there is not much left.
I have a significant amount of money in several Roth and Simple IRA accounts. I no longer contribute to these accounts but they are growing through a variety of investment vehicles. If I remarry but it doesn’t work out and end up divorced, would these accounts be touchable in a divorce. I live in California.
I received a QDRO and received the letter from my ex’s company over 8 yrs ago. I have not received anything since. I decided to look into it because he has avout 34 yrs with the company. When I called the company they now have another company taking care of their benefits. When I called that company they have no order or say they haven’t any information about it. I now got to fax them the order. According to the plan, I found out after much research, that his plan retirement age was 50 and he is now 52. Can I get paid for those 2 yrs. they did not inform me about?
When my husband retired his 401k was in an account where if he took out money I had to sign for it. Without me knowing he somehow got the money transferred to an account only he had control of, which he has now spent all of. I live in Texas. I thought he had to have me sign to have it transferred and should I file divorce can I pursue getting my share ?
In my divorce settlement I was awarded half of my husbands 401k for the period we were married…it was figured on the amount profited in the account which…seeing the market was at an all time low…leaves me with 8.40 cents…now my attorney says we should file a motion to change ruling as there was over 20 thousand put into account during marital period..I assumed this would be the way it was done…so is it legal to just divide the profit…or is it suppose to the amount contributed into the account out of my husbands earnings?