Dividing Retirement Plans During Divorce

Dividing retirement assets is often overlooked in some divorces, but this can be a costly mistake.

By WomansDivorce | Answers by Timothy McNamara, Financial Expert

Next to the family home, retirement plans are one of the biggest assets of the marriage, and should be considering during settlement negotiations. How much will be subject to division depends on when the retirement account was established and how much was contributed to the account during the marriage.

Any contributions made to a retirement account established prior to marriage would be considered separate property and not subject to division in a divorce. Any contributions and increases in value that occur during the marriage would be considered marital property and divisible in a divorce. If the retirement account was established during the marriage, the total value of the plan is considered a marital asset that can be divided in a divorce settlement.

Below the financial expert discusses dividing retirement plans in a divorce and how you can get information about a spouse's retirement plan.

How are retirement accounts divided in divorce?

Timothy's Answer: When a couple divorces, retirement accounts are divided in one of two ways; either through the use of a Qualified Domestic Relations Order (QDRO) or the divorce decree, depending on what kind of retirement account it is. A QDRO is used to divide 401(k) or 403(b) accounts and qualified plans, but not IRA's. For an IRA, this type asset may be divided in the divorce settlement using the term "transfer incident". This is why it is vitally important to divorcing spouses to inform their legal counsel in regards to what type of retirement plans are involved.

If the retirement plan is a 401(k), 403(b) or other qualified plan, a QDRO must be used to divide the assets. This order allows the plan to disburse payments to someone other than the plan holder as part of the marital asset division or for payment for alimony or child support. QDRO documents must be prepared properly, preferably by an expert, to insure they comply with the individual plan specifications. Failure to file the proper documents in a timely manner may result in the non-payment of funds.

When dividing IRA assets a divorce, specific language authorizing the change in ownership must be included in the divorce decree in order for it to be tax-free. If the IRA transfer is not specified pursuant to a divorce decree, the IRA owner will face an early withdrawal penalty.

IRA assets are generally transferred through a custodian or trustee, such as the mutual fund or brokerage firm that handles the account. The IRA owner should check with their financial institution to verify the transfer requirements to insure the proper language is included in the divorce decree. It's important to note that any money a spouse receives from an IRA transfer will be taxed as income. Therefore, it is vital to consult with a financial advisor about the division of such plans.

How do I get information about his retirement plans?

Deborah's Question: How can I find out what retirement plans my husband has. I have never seen any kind of statements.

Timothy's Answer: Sometimes the simplest way to uncover this information is to ask. If that does not work, there are other ways for you to find out about your soon to be ex-husband’s retirement plans. Typically, if an attorney who has been hired to dissolve your marriage, they will conduct a formal discovery process. In the discovery process, each attorney requests information about the other spouse’s finances, assets, pensions and any other financial issues that are of concern.

You might also want to consider reviewing your past tax returns for clues as to what type of funds your husband has sold or received interest or dividends on during the calendar year. If you don't have copies, learn more about Getting a Copy of Tax Return Information.

If your husband works for a company, his W2 will report any contributions to a 401k or company sponsored retirement plan. Your husband’s employee handbook will also contain information whether the company offers a pension plan or some other form of deferred compensation. Both will give you clues as to the existence of a plan, but it will not give you any specific information about your husband’s retirement plans. To receive this information you will need an attorney to subpoena it on your behalf.

If your husband is self-employed, you should check Schedule C on your joint tax return to see if he has made any contributions to a retirement plan. Again, the tax return will not tell you the exact amount in your husband’s retirement plan, it merely proves a retirement account exists. Your attorney can subpoena this information in the discovery process.

If you have concerns that your husband is not being forthcoming with you about your marital assets and you do decide to get a divorce, I would suggest you consult an attorney to make sure your rights to receive a portion of your marital assets are protected. Using an alternative dispute method, such as mediation, to dissolve your marriage may not be in your best interest.