What happens to your retirement accounts in a divorce?
The good news is that with retirement accounts in divorce, a little knowledge can go a long way toward you becoming more comfortable with such discussions and forward-looking as a result without fear taking over. Here are a few issues to consider.
DivisionGenerally speaking, unless your marriage was very short-term, the marital portion of retirement accounts tends to be included in the division of assets. In Massachusetts, retirement accounts are generally considered an asset in divorce, meaning they are distributed equitably.
For a defined contribution plan — where you and/or your employer contribute to the account and there is an ascertainable balance — such as a 401k, 403b, or IRA, whatever was added to the account during your marriage and any gains and losses would typically be divided among you and your spouse at the time of divorce. Any money that your employer and/or you contributed prior to your getting married might not be included in this division, but anything added after you got married likely would be.
Exactly how much goes to each party is subject to change depending on the circumstances. Because assets in Massachusetts are supposed to be distributed equitably and fairly, this means that various factors would be considered by a Massachusetts family court judge when determining who gets what portion of the account, such as the length of your marriage, your income, other assets, potential to acquire assets in the future, your health, and your financial needs, among other factors.
Gains and lossesAny gains and losses in the retirement account between the date of divorce and the actual division are usually shared equally. However, this, too, can be negotiated between the parties.
Generally, both you and your ex-spouse should be awarded the same division of gains (or losses), even if they were realized after the date of divorce. The division of those gains (or losses) is likely to happen after you are officially divorced via a QDRO (Qualified Domestic Relations Order), discussed below, meaning there is time for fluctuations in the accounts up until that point.
If you want to share gains and losses between the date of divorce and division, you should make sure this provision is included in your divorce agreement.
Defined benefit plansA defined benefit plan — also known as a pension — presents different considerations than defined contribution plans.
Generally speaking, similar to defined contribution plans, the marital portion of the pension — any value acquired while you and your spouse were married — will be divided between you and your spouse. Circumstantial adjustments may be made, but each party generally receives their part of the marital portion once the person whose pension it is retires. The ex-spouse then receives their part of the marital portion, paid in whatever manner the pension is designed (typically monthly).
Because pensions are a reflection of payments promised by your employer, a pension’s exact value can be difficult to ascertain. Determining value typically requires an analysis to figure out the present cash value, since a pension is representative of a future stream of income, not a specific value or amount in an account. Valuing a pension is typically only necessary if the parties are offsetting its value with that of another asset, as discussed in more detail below. Survivor benefits from pensions
It is common for the spouse to be named a beneficiary of a pension, especially in longer marriages. Survivor benefits — pension payments for the beneficiaries in the event of the employee’s death — can be complicated by divorce. In divorce, survivor benefits are typically thought of as pertaining to what happens if the party who would receive the pension dies either pre-retirement (before collecting any pension payments) or post-retirement.
These benefits are negotiable, and there are various options for the allocation of benefits to an ex-spouse, particularly in cases where the party dies post-retirement, where there are options for survivor benefits, ranging from no protection for the ex-spouse to near total protection for a sustained period of time.
QDROsExcept for most IRAs, a QDRO (Qualified Domestic Relations Order) is necessary to divide retirement accounts in Massachusetts. A QDRO is a court order that determines how and when retirement benefits are divided between divorcing spouses.
An expert drafts this document and instructs the plan administrator on how to divide the account(s) pursuant to the divorce judgment.
This is a several-month-long process (generally two to six, but it can be longer) that typically extends well past your legal divorce date because of its many steps. A QDRO draft must be pre-approved by the plan administrator, signed by both parties, approved by the court, and eventually filed with the plan administrator to be processed and implemented. Because of how long it can take, you should start the QDRO process as soon after divorce as you can.
Negotiating offsetsThe parties can negotiate offsets if they want. This could allow one party to keep more of the retirement account(s) while the other keeps more cash or equity in the home, for instance. By taking the home in the divorce, that party may decide that they want a smaller share of the retirement account(s) because they are “equal” in value. Additionally, if one party feels they have contributed more to the retirement account(s), they may determine that this is a fairer way of dividing assets in their divorce.
Similarly, if parties have several retirement accounts, they can agree to reduce the number of transactions by calculating offsets between the different accounts and dividing them differently. In the same way that you can supplement a share of the retirement account(s) with another asset (such as a home), you can do so with another retirement account since they are considered assets as well.
When determining if this is an appropriate approach for you, be sure to consider that contributions to some retirement accounts are made pre-tax when comparing assets. Likewise, consider the long-term implications of offsetting for your financial health and well-being.
Final thoughts …Divorce can be a stressful time. However, with some advanced planning, that stress need not cloud your decision-making as it concerns your financial well-being in retirement. By taking the time to understand the implications of your decisions and what options are available to you and your spouse, you can assess how your retirement accounts can best support your future needs following your divorce.
At Farias Family Law, we know how important it is to leave the divorce process feeling secure. That is why our skilled team of Massachusetts divorce lawyers will take great care to analyze and account for your retirement assets so that you can walk away from your divorce knowledgeable about your future and, accordingly, be empowered. Call us today.