In a divorce, marital property is divided between the spouses. Marital property includes all things that have been accumulated during the marriage, including real estate, vehicles, savings accounts, and retirement assets. Retirement assets can often be overlooked. In order to reach an equitable division of property, it is important to understand what assets are available, what the value of these assets are, and what makes the most sense in dividing these assets.
There are many different types of retirement assets. Some, such as IRAs and 401(k)s are easy to determine the true value just by looking at a recent statement. While you may be subject to taxes and penalties, the funds in these accounts can generally be liquidated early. Other retirement assets, such as pensions, can be difficult to determine the value of, and you may need to hire an expert to value these assets. With a pension there is no way to receive funds until the retirement of the employee.
Once you have determined the value of the retirement assets you and your spouse can figure out an equitable way to divide these assets. Many times, divorcing couples immediately jump to “we’ll split them all equally” – meaning Husband will get half of Wife’s IRA, half of Wife’s 401(k), and half of Wife’s PERA and Wife will get half of Husband’s IRA, half of Husband’s 401(k), and half of Husband’s pension. This can cause a lot of headache, and extra expense, when it comes down to dividing the retirement accounts. Instead of focusing on splitting everything evenly, when developing a plan to divide retirement think about what will be required for the division and what the receiving spouse intends to do with those funds. You can still reach an equal division of the assets by offsetting the amounts rather than splitting each asset individually.
Sometimes a spouse wishes to use retirement assets after a divorce towards a down payment of a new house or payment of marital debt. In these situations receiving an award of the 401(k) or IRA will be much more useful than the pension.
Many retirement accounts will require a separate court order specifically regarding the division of that account – a Qualified Domestic Relations Order (QDRO), governed by federal ERISA law. One QDRO can cost a minimum of $300 each. Some accounts (such as IRAs) do not require the separate court order, and other accounts (such as PERAs) allow for special language inserted in the divorce decree for division. You can save several hundreds of dollars by dividing the retirement assets in a way that minimizes the need for QDROs.