April 1, 2022 | Share
Special Considerations for Dividing Retirement Plans in Divorce
Dividing assets in a divorce is never easy, but the process becomes particularly complicated when dealing with certain types of assets. Retirement plans are one of the most common examples. For many couples, pension plans and retirement savings are their most valuable property.
Federal laws require special handling for some retirement assets. Pension plans can be difficult to value. It is important to work with McKinney divorce lawyers who understand the special considerations that apply when you are dividing retirement assets in a divorce.
Qualified Retirement Plans
When contributions to a retirement plan are made with pre-tax funds, so that the tax is deferred until later, that plan is generally considered a qualified retirement plan. A large number of retirement plans offered through the workplace are qualified retirement plans. Special IRS rules apply to these plans, and they fall under the requirements of the federal Employment Retirement Income Security Act (ERISA) as well.
Because requirements are so strict about the distribution of funds from qualified retirement plans, the plan administrators will typically not divide funds in divorce without a qualified domestic relations order (often referred to as a QDRO). The order may be drafted by McKinney divorce lawyers or by a professional who specializes in this type of stylized legal and financial document. If your lawyer does not draft the QDRO, they should specify the terms, including valuation and allocation of benefits.
Placing a Value on Retirement Assets
Before assessing a value for retirement assets, there are many factors for McKinney divorce lawyers to consider. These include:
- Type of plan (defined benefit or defined contribution)
- Whether any contributions include separate property
- How terms in a pre or postnuptial agreement apply
- The date the assets began to accrue
- Whether the value is set at the date of separation, divorce, payment, or some other date
- The cut-off date for marital property
In addition, there are special rules that apply to assets such as military benefits, so it is important to keep those provisions in mind as well. Some benefits may be split evenly while others are not.
Benefits of a QDRO
To distribute assets from a retirement plan to someone other than the account holder (such as a former spouse), retirement plan administrators will need a QDRO signed by the judge. This arrangement causes extra expense, but it can provide some benefits to the retirement plan holder.
The funds distributed from the retirement plan through the QDRO will be taxed as income to the recipient, so the plan holder will not need to pay income tax on that salary or earnings. In addition, when funds are withdrawn from a retirement account under a QDRO, there is no penalty for early withdrawal.
Work with McKinney Divorce Lawyers Who Understand the Complexities of Retirement Assets
If your divorce involves any type of complex assets such as retirement plans or business interests, it is crucial to work with McKinney divorce lawyers who know how to value and divide these assets properly. Mistakes can subject you to penalties and leave you stuck with an unfair allocation of assets. At the very least, you may end up paying extra administrative costs that are unnecessary, such as when plan assets can be combined into a single QDRO but the attorney forgets to specify that option.
At Nordhaus & Nordhaus, PC, we know that your retirement assets have both emotional and monetary value, and we know how to take the right steps to ensure you receive the full amount that you should. Contact us today to find out how we could assist in your situation.
Categories: Family Law & Divorce