By: Alan Freed
For many couples getting divorced, their most valuable assets are their house and their retirement plans. Houses can be sold or awarded to one person or the other, but retirement plans are more complicated. Here are a few facts worth knowing:
1. There are two basic types of retirement plans: savings plans, including 401(k)s, IRAs, and 403(b)s, among others, and pensions.
- Many employers provide their employees with the opportunity to deposit money into a 401(k) or 403(b) plan (to name the most common; there are others). These accounts provide multiple benefits: You don’t pay income taxes on the money you deposit in them, and you don’t pay taxes on any income earned in those accounts. You only pay taxes when you take the money out, which you can do beginning at age 59 ½. Some employers sweeten the deal by matching a portion of your contributions.
- IRAs are similar to 401(k) plans in that they allow you to accumulate savings tax-free. The main difference is that you don’t need to be an employee of a company to save money in an IRA.
- Pensions are plans that pay monthly amounts to people after they retire. Most pension plans are calculated under a formula based upon how long a person worked for the company and how much they earned.
2. Almost all of these retirement plans can be divided as part of a divorce.
- 401(k), 403(b), and other so-called “qualified” plans can be divided using a Qualified Domestic Relations Order (abbreviated as “QDRO,” pronounced “Quadro”). The QDRO tells the administrator of the retirement plan to pay a portion of the plan to the non-employee. The non-employees portion can be rolled over into another retirement plan (commonly an IRA) to avoid paying taxes when the distribution is made. Taxes will only be due on the rollover funds when withdrawals are made at the time of retirement.
- Most IRAs can be divided without using a QDRO. The plan administrator will want you to provide a copy of the judgment dividing the plan and will then have you sign documents to complete the division.
- A pension can be divided with a QDRO that will tell the plan administrator to make separate payments to the retired employee and the former spouse once the employee reaches retirement age.
Additionally, a few retirement plans cannot be divided by a court. Missouri Public School Retirement must remain with the teacher, and certain other plans have restrictions that prevent their division. Your lawyer can help you determine what options are available for your plan or that of your spouse. And, one more thing: a divorce court has no ability to divide Social Security payments. Your rights to Social Security are controlled by federal law.