Retirement Plans in Divorce
In divorce agreements and orders, marital assets and debts are divided equitably (fairly, but not necessarily equally) between the parties. This includes retirement accounts. Retirement plans are categorized as either defined benefit or defined contribution plans.
A defined benefit plan identifies the specific benefit that will be payable at retirement. There is no specific amount attached to the benefit. It is essentially a promise that an employer pay some set benefit at a date in the future. The basic retirement benefit is generally based on a formula that takes into account the employee’s age, the number of years they have worked, and their salary. The retirement benefit is then provided in regular payments over the course of the employee’s lifetime.
The payments may begin after the plan’s predetermined retirement age is reached. The periodic payments are generally known as a pension or an annuity. Payments can be taken out of the defined benefit plan early, but at a reduced rate. Taking the retirement funds out early can significantly reduce the total value of the pension or annuity.
A defined contribution plan differs in that it specifies how much money will go to the retiree in total. The amount is typically a percentage of one’s salary or a specific dollar amount. These funds are then invested in mutual funds available inside the retirement plan. The amount you have at retirement depends on how much the employee and the employer contribute to the plan, how long the funds are invested, and how well the investments perform inside the plan. Examples of these types of plans are IRA, 401(k), 403(b) and 457 plans. These plans are becoming more common than the defined benefit plans. Funds can be taken out earlier than the retirement age, but there are penalties and the amount of money taken out will be subject to taxes.
How are Retirement Accounts Divided During a Divorce?
First, the marital portion of the account is calculated. Calculating the value of a defined contribution plan is straightforward and won’t require any expertise, as it has a current value. However, because the defined benefit plan is not represented by a dollar amount today, and deals with a future benefit, it is harder to value. The value of the plan takes into account the formula benefit promised by the employer, the employee’s age, the health of the employee, the number of years between the employee’s current age and the retirement age of the plan, and the life expectancy of the employee. Utilizing an expert is key in ensuring that the account is valued correctly, and in calculating the marital portion of the account.
If a division of the accounts is appropriate, the value can be divided either by a direct transfer with an account like and IRA, or with a Qualified Domestic Relations Order (QDRO) for pensions.
For more information on divorce and asset division, please contact a Longmont family law attorney at Jorgensen, Brownell & Pepin, P.C. to request a consultation. Our office can be reached at (720) 809-8310.