Divorce Help 101
Retirement Accounts
Retirement accounts accrued during the marriage can be marital property. Often this can be a difficult concept for the parties to grasp as generally their spouse did nothing to contribute the to employer funded retirement accounts.
There are generally two different kinds of retirement accounts to consider, though as is the case with most other areas of family law there can be additional issues to address or other forms of retirement to consider.
The first kind of retirement accounts to consider are generally what are called defined contribution accounts. These are the accounts that most people generally think of when they discuss retirement. With the defined contribution accounts, periodic contributions are made throughout the employee’s tenure with the employer. The principal balance of the account increases through further employee contributions, employer contributions and by the periodic growth in the aggregate balance of the account. When the employee, under the applicable law, is entitled to access the retirement account following their retirement, there is a set pool of money to which they are entitled. If the market activity has been favorable throughout the life of the retirement account, then the balance will be in excess of their contributions. Following this they are entitled to use these funds on a diminishing basis. For example, upon retirement, if a person had a balance of $1000 in their retirement account and took out $10 per month for 20 months, then they would have $800 plus any applicable interest or market activity on the principal balance remaining.
The defined benefit plans are somewhat different. Under these plans throughout the term of the employee’s employment periodic contributions are made to the retirement plan. Upon the employee’s retirement the company administering the plan will determine, generally based upon an actuarial approach, a monthly sum generally derived from the employees last 30-48 months of wage earning. Thereafter the employee will receive this benefit paid on a regular basis, generally monthly. This is paid without regard to the amount the employee had contributed on their behalf during their employment so long as they are vested in the plan as defined by the plan administrator. However, the balance contributed does play a part in determining survivor benefits. Should the party die prior to recouping the aggregate amount of the periodic payments they can designate a beneficiary or beneficiaries to receive the remaining balance. However the monthly payments reduce the survivor benefits in an amount equal to the periodic payments so that after the amount of contribution has been paid out by way of periodic payments, there generally be no survivor benefits.
Many people are often misinformed when it comes to the manner in which these retirement accounts are divided. As these plans are created using pretax dollars, there is generally a penalty for removing the funds prior to the employee reaching a certain age. As well, anytime the funds are removed they are subject to taxation. Many people believe that they will be required to pay the penalty and taxes to get the funds to divide with their spouse. While the funds can be distributed in such a manner, there is a mechanism to divide the funds to avoid any taxes or penalties.
To accomplish this, a document called a Qualified Domestic Relations Order, or QDRO, is prepared. This document is quite technical and is best prepared by a financial or legal professional, but once it is created, it is signed by the appropriate Court and requires the retirement account to be divided in keeping with the terms of the applicable Family Court order. Defined contribution accounts are rolled over into a qualifying plan without penalty or tax and defined benefits plans are paid out in accordance with the order with the party receiving the payments being responsible for any taxes.
For any retirement account only the marital portion is divided and any contributions that are made following the divorce, and often the date of the filing of the marital litigation, is the sole property of the spouse making the contribution.
Disclaimer
There are generally two different kinds of retirement accounts to consider, though as is the case with most other areas of family law there can be additional issues to address or other forms of retirement to consider.
The first kind of retirement accounts to consider are generally what are called defined contribution accounts. These are the accounts that most people generally think of when they discuss retirement. With the defined contribution accounts, periodic contributions are made throughout the employee’s tenure with the employer. The principal balance of the account increases through further employee contributions, employer contributions and by the periodic growth in the aggregate balance of the account. When the employee, under the applicable law, is entitled to access the retirement account following their retirement, there is a set pool of money to which they are entitled. If the market activity has been favorable throughout the life of the retirement account, then the balance will be in excess of their contributions. Following this they are entitled to use these funds on a diminishing basis. For example, upon retirement, if a person had a balance of $1000 in their retirement account and took out $10 per month for 20 months, then they would have $800 plus any applicable interest or market activity on the principal balance remaining.
The defined benefit plans are somewhat different. Under these plans throughout the term of the employee’s employment periodic contributions are made to the retirement plan. Upon the employee’s retirement the company administering the plan will determine, generally based upon an actuarial approach, a monthly sum generally derived from the employees last 30-48 months of wage earning. Thereafter the employee will receive this benefit paid on a regular basis, generally monthly. This is paid without regard to the amount the employee had contributed on their behalf during their employment so long as they are vested in the plan as defined by the plan administrator. However, the balance contributed does play a part in determining survivor benefits. Should the party die prior to recouping the aggregate amount of the periodic payments they can designate a beneficiary or beneficiaries to receive the remaining balance. However the monthly payments reduce the survivor benefits in an amount equal to the periodic payments so that after the amount of contribution has been paid out by way of periodic payments, there generally be no survivor benefits.
Many people are often misinformed when it comes to the manner in which these retirement accounts are divided. As these plans are created using pretax dollars, there is generally a penalty for removing the funds prior to the employee reaching a certain age. As well, anytime the funds are removed they are subject to taxation. Many people believe that they will be required to pay the penalty and taxes to get the funds to divide with their spouse. While the funds can be distributed in such a manner, there is a mechanism to divide the funds to avoid any taxes or penalties.
To accomplish this, a document called a Qualified Domestic Relations Order, or QDRO, is prepared. This document is quite technical and is best prepared by a financial or legal professional, but once it is created, it is signed by the appropriate Court and requires the retirement account to be divided in keeping with the terms of the applicable Family Court order. Defined contribution accounts are rolled over into a qualifying plan without penalty or tax and defined benefits plans are paid out in accordance with the order with the party receiving the payments being responsible for any taxes.
For any retirement account only the marital portion is divided and any contributions that are made following the divorce, and often the date of the filing of the marital litigation, is the sole property of the spouse making the contribution.
Disclaimer
