Just when you thought things couldn’t be more complicated, when you get divorced, accrued and vested retirement benefits are considered community property. This means that your savings such as 401K plans, IRAs, ERISA funds, military pensions, and employee stock option plans are subject to the community property laws.
There are two primary methods for dividing retirement benefits including using a present-day valuation buy-out (the non-owning spouse uses the present-day value of their interest in the benefits and trades it for something else of equal value) and simply dividing the accounts into two.
When retirement accounts are divided, there can be potential tax advantages or losses. This is where a QDRO (Qualified Domestic Relations Order) comes into play. This requires a transfer of a share of the retirement funds from the participating spouse to the non-participating spouse.
A situation that may appear with retirement accounts are those that existed before the marriage, but had continued contributions to the account during the marriage. Thus, there is potential separate and community interest in the account. When this happens, it will require close review to determine what is separate and what is community.
When it comes to pensions, a majority of retirements plans will pay the pension benefits directly to the divorced spouses when there is a QDRO. This division is usually required at the time of divorce when the marital assets are being divided. In most scenarios, the payments can be made for the life of the employee or retiree. It is important to understand that the rules related to division of pensions in a divorce are highly complex and vary from state to state (as well as differing by the retirement system), thus it is recommended that you seek out the guidance of a qualified pension attorney.
Another benefit that can be a factor of divorce is social security benefits. This applies to couples who were married for at least ten years and the spouse doesn’t have work credits that exceed half of their ex-spouse. Thus, once the spouse dies, if the ex-spouse doesn’t have at least half or more of the work credits of the deceased, they will be able to withdraw 100 percent of the survivor benefits.
Ultimately, when you are getting divorced and have retirement benefits, it is important to discuss and agree to how they will be settled. This can be important to ensure such issues as being sure that either you are receiving the appropriate share of the benefits, or if you are the individual participating in the benefits plan, not be subject to excessive division of the benefits.