1. Is my retirement account a marital asset?
Any contributions to a retirement account during marriage together with the increased value of those contributions due to market gains are considered a marital asset. The fact that the account is just in one spouse’s name and further that the contributions were made by the employee spouse or his or her employer does not affect the marital character of this account. On the other hand, any contributions to your retirement account prior to the marriage or after the divorce petition has been filed are considered non-marital and need not be shared with the other spouse. Market gains attributable to these non-marital contributions are likewise non-marital.
2. Can my retirement account be divided without triggering taxes?
Yes, tax deferred accounts such as IRA’s and 401K’s can be divided between spouses free of taxes or penalties if it is done pursuant to a final judgment of dissolution of marriage or divorce decree. Division of IRA’s is a simple process of completing a form which instructs the plan administrator to separate the funds according to a dollar amount or a percentage. An employer based 401K on the other hand must divided using a qualified domestic relations order or QDRO. The process of dividing retirement funds via a QDRO is much more expensive and time consuming, and an area ripe for mistakes for the unsuspecting spouse or divorce attorney. Conventional defined benefit pensions, those which pay a monthly sum upon retirement, can only be divided by a QDRO as well.
Be careful as I’m referring to the division of retirement accounts not the distribution of them. Distributions are taxable and, with some exceptions, subject to an early withdrawal penalty.
3. Can I avoid the IRS’s early withdrawal penalty in a divorce?
Under certain circumstances, the non-employee spouse may take a one-time distribution of retirement funds in connection with a divorce without being subject to the IRS’s 10% penalty. If you are interested in this option, it is important to address it with your divorce lawyer and CPA prior to finalizing the divorce.
4. Are my retirement funds worth the same as other assets in our marital estate?
Simply stated…No. When valuing the marital estate for divorce purposes, retirement assets must be “tax affected.” In other words, the value of a retirement account must be discounted by the spouse’s tax rate as well as the IRS’s early withdrawal 10% penalty, if the spouse is less than 59 1/2. It’s important to “compare apples with apples.” One hundred thousand dollars in a money market account is worth much more than one hundred grand in an IRA. If you cash out this money from an IRA, you will have to pay taxes on the withdrawal based upon your current tax bracket (or it could kick you to the next higher bracket) plus the 10% penalty. Therefore, withdrawal from the IRA is really worth, let’s say, $75,000.00 not $100,000.00. That’s a big difference.
Conclusion
When contemplating a divorce or if confronted with one, it’s important to consult with a qualified, experienced divorce and family law attorney. Your attorney, if he or she specializes in divorce, will typically work with an accountant as well as a certified divorce financial analyst. These experts can save you tens of thousands of dollars by helping you avoid common divorce pitfalls. I’ve been practicing divorce and family law in the greater Daytona Beach area, including Volusia, Flagler, Seminole and St. John’s Counties, for over 30 years. I’m board certified by the Florida Bar in marital and family law. Less than six percent of all Florida lawyers are board certified. Should you have any questions about your rights and responsibilities as they relate to your or your spouse’s retirement account or pension, feel free to contact me at paulrice@riceroselaw.com or 386-257-1222.
