Home > 2016 > Personal Finance

How Retirement Plans Get Divided in a Divorce

Advertiser Disclosure Comments 0 Comments

When a client first appears in my office for an initial consultation regarding their divorce, one of the first questions they want an answer to is “what am I (or what is my spouse) entitled to?” After getting information about the marriage history, the parties’ assets, income and their children, I give them what I call a short crash course in family law. This course starts with property division.

In family law, generally, assets that have been accumulated as a result of work efforts of either party during the marriage are considered to be marital. These assets include any contributions to retirement plans, either by the employer or the employee. Sometimes, these contributions are accumulated on top of retirement assets that were already in place on the date of marriage, which can add further complications to dividing that particular asset at the time of divorce. Here is a primer on how retirement plans generally get divided once a marriage is over.

‘Gray Divorce’ Is on the Rise

Dividing assets for divorcing couples can sometimes be a challenge no matter how old the parties are, but typically as parties get older, they also have more stuff to divide. While divorce can happen at any age, “gray divorce” — an industry term for senior citizen divorce — is on the rise. According to a recent survey of the American Academy of Matrimonial Lawyers (AAML), 61% of the nation’s top divorce attorneys say that they have seen an increase in the number of divorce cases among couples over 50. In fact, in 2014, it was reported that the percentage of seniors getting divorced has doubled since 1990.

Determining Division

Without a prenuptial agreement, typically assets added to any retirement plan during the marriage will be considered marital. This means that if there were assets in a 401(k) at the time of the marriage, the balance as of the date of marriage can be carved off. This process involves making sure you can actually prove how much was in there on the date of marriage. (Some parties then even go as far as to try to calculate what the increase in value would be on just those assets — a task that can often be fraught with error, but can happen.) That portion gets carved off and the balance, now considered the “marital” portion, will be distributed between the parties.

A general rule of thumb is that the remaining balance would be split equally, but sometimes, in order to ensure equity and justice, a court may decide that the marital portion would be split unequally.

Divvying Up the Funds

Once it is determined, either by a court or by agreement of the parties, what portion of the retirement assets are marital, and what percentage is going to whom, then the actual division has to take place. This is where some tax implications must be considered.

Retirement assets (excluding deferred compensation and some others) are usually dollars that have not yet been taxed. The thinking is that the individual gets to save money on income taxes when he or she is in a higher tax bracket, and then gets taxed when the funds come out during retirement, when that person in now in a lower tax bracket.

So, in order to divide the funds and roll them out to one spouse from another spouse’s plan, and not have either spouse incur a tax liability (and potential penalty), Congress amended the Employee Retirement Income Security Act of 1974 (ERISA) in 1984 and passed the Retirement Equity Act (REACT). REACT created an exception to ERISA, and, thus, the qualified domestic relations order (QDRO) was born. A QDRO permits divorcing spouses to receive all or a portion of a retirement plan participant’s benefits for purposes of support and/or property division, without having a tax consequence.

When Are QDROs Required?

QDROs are required for pensions, 401(k)s, 403(b)s and other company retirement plans (government plans have their own rules for division). They are generally not required for Individual Retirement Accounts (IRAs). Rollover IRAs that were created by individuals who have separated from companies and took their 401(k) from their former employer and rolled the funds into a Rollover IRA also generally do not require QDROs for dividing the accounts.

The QDRO Process

In general, QDROs should be prepared by an attorney or another professional who specializes in drafting them. They are much more complicated than they appear. Many companies do offer model language, which can be a useful guide, and they also offer a review service free of charge to ensure that the language of the QDRO meets their guidelines.

Once it has been reviewed and approved, the order is then submitted to the court to be signed as an order, and then incorporated into the Final Judgment of Dissolution of Marriage. The signed order then gets sent to the company so that the division can be effectuated.

Dividing retirement assets can be a bit of a messy business, but can be done. You may want to consider consulting an attorney or tax professional to ensure that the division is completed properly.

More Money-Saving Reads:

Image: Randy Faris/Fuse

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team