Retirement - How to Value and How to Divide

Retirement assets are savings or other benefits that have some sort of favorable tax implications when used in your later, retirement years. Retirement is one of the most complicated financial assets to understand whether you are going through a divorce or not. It is important to first understand the particular types of retirement accounts or benefits and then how they are handled in divorce.

Retirement accounts can only be held in one person’s name.

• If you see an account that is held jointly, with two people named, it is most likely not a retirement account.
• Just because it is individually held doesn’t mean it can’t be shared – if earned during the marriage, it may be considered joint or shared.

Two main types of retirement accounts.

• Qualified Retirement Plans
  • Saved pre-tax, grow without taxes (tax deferred), then taxed as income when cashed out in retirement
  • If you cash it out before age 59½, pay taxes and penalty
  • Many rules and regulations on these accounts
  • Usually sponsored by employers and often matched or funded in some way by employer
  • “Defined contribution plans,” like a 401(k), 403(b) or 457(b), have contribution limits
  • Pension plans (or “defined benefit plans”), where you receive an ongoing payment in retirement, have rules about the benefit to be paid int he future and can be hard to value

• Non-Qualified Retirement Plans
  • Also, saved pre-tax, grow without taxes (tax deferred), then taxed as income when cashed out in retirement
  • If you cash it out before age 59½, pay taxes and penalty
  • Less regulations
  • Individual Retirement Accounts (IRAs) are the most common type
  • Not usually associated with an employer
  • Roth IRA is a type of plan that is saved after tax, but then growth is tax free

Retirement can be divided in divorce without taxes or penalties.

First, identify all retirement accounts, named participant in the plan and account balance.

Then work through the division:

• Marital or shared accounts (built up during the marriage) can be shared equally – often use one or two accounts to divide to make the overall balances equal
• Retirement from prior to marriage (and possibly the growth on that retirement) usually stays with the named participant on an account
• Differentiate between after-tax Roth retirement and pre-tax accounts – they are not the same
• You may be able to obtain a present value of a pension (often with a professional valuation) and then use that in the overall retirement division
• You can usually divide retirement accounts AFTER divorce without any tax consequences
  • Divide retirement or shift some from one of you to the other and it stays in retirement if it is clear in the divorce decree
  • For qualified plans, you will need a special order form the Court
  • For non-qualified plans, you can likely divide it by providing the retirement plan administrator a copy of the decree and they will divide it for you
  • Pension benefits (the payments in retirement) can often be divided with a special order
  • It’s a good idea to check with the plans before you finalize a divorce to make sure you can divide them in the manner you want
  • Think about the variable nature of the account values over time and know it will often take a few months or longer after divorce to finalize this division

Emotional considerations of dividing retirement

• May represent years of hard work, dedication, and financial planning
• May symbolize identity and sense of security for the future  
• Dividing retirement accounts can evoke feelings of loss, uncertainty, and anxiety about one's financial future
• Trigger emotions related to fairness and justice