How Are Retirement Accounts and Pensions Divided in a Divorce?

 Posted on March 21, 2023 in Property Division

Retirement accounts and pensions are often among the largest assets in a married couple’s estate. When a couple decides to get a divorce, these assets must be divided between the spouses alongside multiple other types of marital property. It is important to understand the issues that will need to be considered when dividing retirement benefits. This can ensure that the financial interests of both spouses will be protected, and it can help them make informed decisions about their future.

Options for Dividing Retirement Accounts and Pensions

Retirement savings accounts, including 401Ks or IRAs, usually consist of money that is deducted from a person's income and invested in financial funds. These accounts will grow over time, providing the account holder with income they can use to meet their needs after their retirement. Pension benefits are similar, although they usually will not require deductions from a person's income. Instead, they will consist of ongoing benefits that will be paid from a pension fund after retirement.

These benefits are typically considered marital property if they were earned during a couple's marriage. Because of this, they will be subject to division between the two spouses in the event of divorce. In some cases, spouses may create a divorce settlement in which they will divide the funds in retirement accounts equally. However, other arrangements may also be made, such as having each spouse retain ownership of an account in their own name or allocating other assets in a way that allows one spouse to own an account and the other to own property of a similar value.

Pension benefits can sometimes be more difficult to divide. Since the amount of the monthly benefits that a pension holder will receive may not be known until they are close to retirement, the actual value of these benefits may not be possible to determine at the time of a couple's divorce. Because of this, it is often preferable for spouses to make plans to divide pension benefits at the time they are being paid out. That is, when the pension holder retires, the amount of the benefit that is considered marital property will be determined based on the number of years they worked in a pension-eligible position compared to the number of years they were married. Based on these figures, a certain percentage of the pension benefits will be paid to the pension holder's ex-spouse.

Tax Implications of Dividing Retirement Accounts and Pensions

It is also important to consider the taxes that may apply when dividing retirement accounts and pensions. Generally speaking, funds withdrawn from retirement accounts before a person reaches the retirement age of 59 ½ are subject to income taxes plus an additional 10 percent penalty. However, when dividing retirement accounts during divorce proceedings, steps may be taken to ensure that early withdrawal penalties and income taxes will not apply. Couples may use a Qualified Domestic Relations Order (QDRO) to transfer funds. This type of court order will be provided to a retirement plan administrator, who will be instructed to transfer a certain amount of funds to the account holder's ex-spouse. This will prevent the 10 percent penalty from being assessed, and income taxes will not need to be paid if certain conditions are met (such as by transferring the funds directly into another qualified retirement account). A QDRO may also be used to divide pension benefits, and it will instruct the pension plan administrator to pay a portion of the benefits to an alternate payee.

Contact Our Waukesha Retirement Asset Division Attorneys

During your divorce, you will need to carefully consider how retirement accounts and pension plans will be divided. This can ensure that your financial interests will be protected and that you will be able to meet your needs in the future. At Bucher, Wolff & Sonderhouse, LLP, our Muskego property division lawyers can help you negotiate a beneficial property settlement in your divorce, and we can help you use QDROs to divide retirement assets. To schedule a complimentary consultation, contact us today by calling 262-232-6699.