Divorce and Retirement Plans

January 21, 2015

Divorce involves dividing all kinds of property, from bank accounts to houses to furniture. One kind of property that is especially significant in a property settlement is a retirement plan. Retirement benefits are one of the most valuable assets that an average couple owns, and often contain hundreds of thousands of dollars or more. Different types of retirement benefits include:

  • 401(k) accounts,
  • IRAs,
  • Corporate pensions,
  • Stocks and bonds,
  • Stock options,
  • Deferred compensation packages, and
  • Thrift savings plans.
What Portion of Retirement Benefits Are Divided?

Usually, retirement accounts are divided along with a couple’s other assets at the divorce. Florida is an equitable distribution state. This means that a judge divides a divorcing couple’s marital property in a just and fair manner, but not necessarily completely equally.

One major factor affecting how a retirement account will be divided in a property settlement is the length of the marriage. In a Florida divorce, only the marital property will be divided. Marital property belongs to both spouses equally, and includes assets and debts acquired during the marriage. (Nonmarital property includes assets and debts acquired by one spouse prior to the marriage or bequests or gifts made to one spouse only.)

Regarding retirement benefits, marital property includes only the portions of the benefits that are earned during the marriage. Thus, in a divorce, only the portion of the retirement benefits that have accrued during the marriage will be divided. For example, if a spouse worked for twenty years but was only married for five of those years, only five years worth of benefits will be divided at divorce.

The Division Process

To divide retirement benefits, a qualified domestic relations order (QDRO) is required. In addition to their use in property settlements, QDROs can also be used for alimony or child support. QDROs are complex and technical documents that have a huge impact on the division of property. A QDRO establishes the right of an ex-spouse, known as an alternate payee, to get a certain percentage or amount of a retirement plan’s balance or of the plan’s payments. The QDRO directs the administrator of the retirement plan to pay a certain portion of the benefits or balance of the plan to the alternate payee. If the QDRO is prepared incorrectly, there can be serious tax consequences.

The process of drafting a QDRO begins at the property settlement. At this stage, the determination is made as to how the retirement accounts will be divided. Next, the QDRO is drafted. Since the purpose of the QDRO is to take retirement benefits from one spouse and give them to the other, the QDRO is always drafted to the advantage of the alternate payee spouse. It is advisable to have the QDRO drafted by the time the divorce becomes final, though it cannot be executed until the divorce before the divorce becomes final.

If you are going through a divorce, it is essential to obtain the advice of an experienced attorney on how to divide complex and valuable assets such as retirement accounts. Please contact West Palm Beach family law attorney William Wallshein for a free initial consultation.