What Happens to Retirement Benefits in a Divorce?

Often, retirement benefits are one of the most valuable assets to consider in a divorce case.

Community Property, or Not?

Accrued or vested retirement benefits are community property, thus subject to division in a dissolution action. The retirement benefits which are subject to this community property application include military pensions, veterans educational benefits, ERISA funds, IRAs, Keoghs, Employee Stock Option Plans (ESOPS), 401K and 403K plans, etc. 

Certain retirement benefits are not considered community property. They include railroad retirement benefits, social security payments, compensation for military injuries, and worker's compensation disability awards.

All Retirement Benefits Must Be Accounted For in the Divorce Settlement or Judgement

In all dissolution actions, no matter the length of the marriage, the issue of retirement benefits should be settled one way or the other. For example, the petition, marital settlement agreement and judgment should all provide either for the spouse's waiver of retirement benefits or the division of any such benefits. A spouse should waive retirement benefits only if that spouse's share is worth very little.

Dividing Benefits: Buy-Out vs. Dividing Ongoing Benefits

In the case of a division, there are two options: (1) the presents-day valuation buy-out, and (2) division into two accounts. In the former, the spouse without the retirement benefits takes the present-day value of his or her interest in the retirement benefit and trades it for something else of equal value, such as cash or other assets. Note that stock options and pension plans where a person must work for a certain number of years may be worth more than you think, and it may be advisable to retain a professional pension actuary or appraiser. This will cost $150 to $300, but will be well worth it.

QDROs

If the retirement account is to be divided, special attention must be paid so that the tax advantages of retirement benefits are not lost. A Qualified Domestic Relations Order (QDRO) will be required to transfer a share of retirement funds from the spouse participating in the retirement plan to the other spouse. Please contact the retirement plan administrator or a qualified divorce attorney for more information regarding QDROs.

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