Doug hadn’t wanted a divorce but could see it coming. He was also alright with it, deep down. He knew that his wife would be happier without him around. The only thing about which Doug worried was his retirement account. He had worked so hard and long to build up that account. His wife had worked some, too, but her retirement account wasn’t nearly the size of his account. She had also insisted on keeping her retirement account invested in the lowest-risk bonds, so that her account hadn’t grown nearly to the extent that his account had. What was going to happen to his retirement account in the divorce was really the only thing that concerned him.

Property

State divorce laws across the country vary to some degree, but those laws tend to treat retirement accounts like other property that the parties to a divorce proceeding must classify and divide. A retirement account may be intangible property, reflected only by electronic numbers on a screen. But retirement accounts can be every bit as valuable as tangible personal property like vehicles and technology items, real property like homes and lands, and other intangible property like checking and savings accounts. Spouses plan on retirement accounts to fund household expenses after retirement, along with Social Security retirement benefits and other savings. But they can also cash in retirement accounts early, to pay medical or other critical expenses, or for other reasons, although with certain penalties or tax disadvantages. Retirement accounts are thus much like other assets, explaining why divorce laws can, depending on the circumstances, treat them as marital property divisible in a divorce.

Types

Here in this chapter, retirement account refers to one of the special forms of tax-advantaged accounts Congress recognizes to promote retirement savings. Tax-advantaged retirement accounts can come in several types. For-profit employers may offer employees a 401(k) plan, enabling employees to divert a portion of their pre-tax wage into their 401(k) retirement account. Public schools and charity employers may offer employees a similar 403(b) plan, with the same opportunity to divert a portion of pre-tax wages into their 403(b) plan. Other employees may be able to make Individual Retirement Account (IRA) contributions out of pre-tax wages, into their individually controlled IRA accounts. A Roth IRA contribution allows individuals to make post-tax contributions to an individually controlled Roth IRA account. A married couple may own one, two, or more different retirement accounts of these types between them, established at different times, through different employers or other circumstances, and having values of different amounts.

Features

A common feature of tax-advantaged retirement accounts, other than the Roth IRA account, is their pre-tax wage contribution. Contributing pre-tax wages can mean devoting more of one’s income to retirement accounts than one would otherwise be able. Another common feature of tax-advantaged retirement accounts is that their growth, including reinvested dividends, remains untaxed, at least until withdrawal. Those two tax advantages tend to encourage individuals and married couples to place more of their investable assets in these retirement plans, over ordinary brokerage accounts. In short, married couples facing divorce may have more value in their retirement accounts than in any other investment or tangible asset. How the court treats your retirement accounts and your spouse’s retirement accounts in a divorce proceeding can be your most significant financial issue in your divorce’s outcome.  

Marital

Again, state divorce laws across the nation vary, making general pronouncements about them tricky. Consult your knowledgeable attorney representative in your individual case, to learn your rights and responsibilities with respect to the treatment of retirement accounts in your divorce. That said, some states authorize their divorce courts to classify retirement accounts as marital property rather than separate property, to the extent that their contributions arose out of earnings during the marriage. If your spouse brought a retirement account into the marriage without adding to it, that account will likely remain your spouse’s separate property in a property division in your divorce. But if your spouse added to that pre-marriage account with contributions during the marriage from earnings, then the portion of the account representing those marital contributions may be a marital asset subject to equitable division. And if your spouse formed a new retirement account during the marriage, funded entirely by marital earnings, then that account will again likely be marital property subject to division. The same rules would apply to your own retirement accounts.

Award

Just because a court may classify retirement accounts as marital property does not mean that the judge will necessarily divide those accounts for an equal award between the divorcing spouses. The parties may negotiate a divorce judgment that awards retirement accounts to their titled owner, each to their own. If the accounts are unequal, as they often would be, the parties may negotiate other adjustments to the property division to rebalance that inequality. In other words, one spouse may get that spouse’s larger retirement account, while the other spouse gets the marital home or a rental property, savings account, or other asset or combination of assets of equal value. If the parties do not agree and the judge instead imposes a property division, the judge may do likewise, either awarding half of the retirement accounts to each party or rebalancing an uneven award of retirement accounts with other property divisions.

Allocation

You can see from the prior paragraph that dividing retirement accounts equitably may require more than just giving one, two, or three retirement accounts to one party, and other retirement accounts to the other party. An equitable award may require allocating part of one retirement account to one party and part of the same retirement account to the other party. In other words, awards of retirement accounts don’t have to be an all-or-nothing proposition. A judgment of divorce may make a fine-tuned allocation of accounts and portions of accounts to ensure equity. 

QDROs

If you and your spouse face such a situation in your divorce, at least one of you will need skilled attorney representation to carry out that fine-tuned division of retirement accounts. The reason is that the parties cannot simply drain the accounts to set up new accounts according to their ordered allocation. Doing so would destroy their tax-advantaged status and likely require the payment of substantial income taxes along with potential penalties. Instead, the retirement funds must remain in their tax-advantaged accounts but subject to qualified domestic-relations orders or QDROs. The trustees for the account, at the brokerage house investing the accounts, must recognize properly drafted and entered QDROs. Your attorney’s task is to draft a proper QDRO consistent with the negotiated agreement or imposed divorce judgment, obtain the judge’s signature on it, get it filed with the court, and get a certified copy of it into the trustee’s hands, with the trustee’s acceptance and approval. Those tasks may require weeks or months of skilled and diligent effort, presumably justified by the value of the retirement accounts so treated. Understand the role and value of a QDRO, as well as the challenge of getting a QDRO in place.

Payees

You may wonder how you access retirement benefits under a QDRO. In effect, a properly entered QDRO effectively makes the non-retirement account holder of the QDRO’s interest an alternate payee on the designated portion of the retirement account. Retirement account trustees ordinarily listen to the retirement account owner, the individual making the contributions and whose name is on the account, as to when to make retirement distributions in what amount. But trustees know that account owners get divorced. Trustees also know the federal tax laws and state divorce laws authorizing QDROs. The spouse who gains a right to all or a portion of the other spouse’s retirement account under a QDRO issued in a divorce proceeding in effect gains the right to direct the distribution of that portion of the retirement account. Get qualified attorney advice for the details of those rights. But know that you’ll benefit from the designated portion.

Pensions

QDROs can apply not just to 401(k), 403(b), IRA, and Roth IRA retirement accounts. They can also apply to employer pensions. Many fewer employers are offering pensions, the costs and risks of which can be difficult to manage in a competitive employment and business environment. By far the majority of employers instead offer the individual retirement plan options that Congress created to address the looming pension issues. But you or your spouse may still have a pension gained during the marriage, either long ago when pensions were common or more recently in one of the few fields or sectors in which pensions still exist. If so, then the above rules for classifying, awarding, and allocating retirement accounts may well apply equally to the pension. Consult your attorney regarding your specific state’s laws and your specific circumstances, regarding pension rights in divorce. Just don’t overlook these potential pension issues.

Annuities

Some married couples acquire annuities, often in the course of planning for retirement. An annuity is a contract with an insurance company or financial institution in which the company or institution promises to make periodic payments in exchange for the contract purchaser’s lump-sum payment up front. Annuities commonly permit the purchaser to determine when to start payments in the distant future, depending on the purchaser’s retirement planning and needs. Once begun, the payments may continue for the purchaser’s life or for a definite period extending beyond the purchaser’s life, for the benefit of a designated survivor. If you or your spouse own an annuity, it may qualify as marital or separate property, depending on its acquisition before or during the marriage, and potentially the nature and source of the acquisition funds. Annuities can be marital property. They may also require award or allocation under a QDRO, depending on other particulars. Get skilled attorney advice for treating annuities in divorce.

Social Security

Unlike retirement accounts and pensions, Social Security retirement benefits are not generally treated as divisible property interests in a divorce, even if the spouse anticipating or receiving the Social Security retirement benefits qualified for those benefits during the marriage. Instead, spouses may either qualify for their own Social Security benefits based on their own earnings, qualify for a spousal benefit under their spouse’s Social Security, or choose either their own benefits or their spousal benefit, if they qualify for both. A divorced spouse who would have qualified for spousal benefits but for the divorce can still qualify. You don’t necessarily lose your spousal-benefits rights on divorce, although you may lose the greater benefit that would have accumulated if you had remained married while your spouse continued to work. The Social Security Administration determines your Social Security benefits, not the divorce court.

Brokerage

In all of the above discussion about the treatment of retirement accounts and pensions in a divorce proceeding, don’t confuse retirement savings held in brokerage or other accounts with retirement accounts. You and your spouse may have set aside retirement savings in various accounts, even though those accounts offer no special tax advantage. You may think of them as retirement savings, but Congress and the IRS do not treat them in the fashion of tax-advantaged retirement accounts. Those brokerage accounts you and your spouse hold may be marital property or separate property under the rules, principles, and factors discussed above. If they are marital property subject to division in divorce, then an agreement or divorce judgment may award them to one spouse or the other, or allocate portions. The parties may then withdraw their portions to place in other brokerage accounts as they desire, and manage their own awarded brokerage accounts as they wish, designating beneficiaries and directing investments. Brokerage accounts thus don’t present any special issues or problems, unlike retirement accounts and pensions.

Key Points

• Retirement accounts like 401(k)s and IRAs can be marital property.

• Retirement accounts can have large investment advantages.

• Retirement accounts may be the primary or significant marital assets.

• Divorce courts award and allocate retirement accounts under QDROs.

• A QDRO effectively makes a spouse an alternate payee on the account.

• Pensions can also qualify as marital property divided under QDROs.

• Annuities can also qualify as marital property divided under QDROs.

• Social Security retirement is not generally divisible in divorce.

Read Chapter 17.