Divorces are often fraught with heightened emotions, especially when it comes to the division of assets that were obtained during a marriage. Couples with significant assets often find themselves in disagreement about who is entitled to what, and that often results in a contested divorce in which a judge must weigh evidence and testimony to arrive at a decision.
The guiding principle when dividing assets in a divorce is to make that division equitable, which does not necessarily mean that each side gets half. The term ‘equitable’ refers to a division that a judge deems to be fair and just, and there are many factors that weigh into a judge’s decision about what is fair and just, including the contribution each spouse made to the assets, how long the marriage lasted, and the income of each spouse during the marriage.
But in community property states, the court must divide the assets equally, which means a real 50/50 split, regardless of the contribution each spouse made to the acquisition of assets. However, there are only nine states that operate under the community property clause: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
When it comes to the division of retirement accounts, there are some retirement plans that are considered marital property, and other accounts that are not included as marital property. Let’s take a look at how retirement accounts are handled in a divorce.
Retirement Accounts That May Be Subject to Division of Assets
In general, most retirement accounts will be included under the category of marital property, and will thus be subject to a division of assets ruling by a judge. The accounts under this designation, include:
- 401K Plans – this is an employer-sponsored retirement savings plan that lets workers designate a specific portion of their paycheck to a retirement account. Many employers match an employee’s contribution up to a certain limit, and taxes are not paid until the money is withdrawn from the account.
- Individual Retirement Account (IRA) – unlike a 401K, an IRA is not sponsored by an employer but is a private savings retirement account that you can open with a number of different financial institutions. The IRA offers tax-deferred advantages and tax-free growth, and there are two main types: Roth IRA and Traditional IRA.
- Profit-Sharing Plans – this is an employer-sponsored plan that allows employees to share in company profits based on quarterly or annual earnings. Because employees don’t contribute to this type of plan, the amount of money in the plan varies based on the company’s performance. But this plan incentivizes employees to help the company reach profit goals so that they can share in the earnings.
Retirement Accounts That Cannot Be Included As Marital Property
There are also some types of retirement accounts that cannot be included as marital property and therefore are not subject to division of assets during a divorce.
These retirement plans include:
- Military Injury Benefits
- Railroad Workers’ Retirement Accounts
- Social Security Accounts
- Workers’ Compensation Benefits
These retirement plans/benefits are distributed under the supervision of federal law, which supersedes state law and prohibits them from being considered distributable marital property.
How Distributable Marital Property Is Divided In a Divorce
In a community property state, all retirement accounts that are considered marital property are equally divided between both parties. Inequitable distribution states, such as Florida, a judge determines the division of retirement accounts based on factors unique to each case.
But in both circumstances, the court can divide retirement accounts by two methods: deferred distribution or immediate offset.
With deferred distribution, the division of the retirement account is deferred until the benefits are payable to the owner of the account. This often results in a higher payout to each party, but the disadvantage is that it could take decades before any money is paid out.
With the immediate offset option, the court will distribute the retirement account benefits immediately by calculating the present value of the retirement account.
It’s important to remember, however, that to prevent your soon-to-be-former spouse from draining the retirement account, you must petition the court to issue a Qualified Domestic Relations Order (QDRO). This is a court order that prevents a party in a divorce from accessing a retirement account and requesting payouts for the sole purpose of denying those funds to the other person in the divorce.
An experienced family law attorney must file this order with the administrator of the retirement plan, and the plan administrator must approve the QDRO and send that approval to the court before it is considered an official order of the court.
Remember, however, that a QDRO would only cover retirement accounts that are considered marital property. Therefore, it would not apply to government pensions such as social security, and certain types of military pensions.
Hiring a Lawyer To Help You In a Divorce
Division of assets in a divorce can be a complicated and often contentious process that can take months and sometimes years to resolve. This is especially true if you don’t live in one of the nine states where assets are divided 50/50 because without presenting strong evidence to a judge in an equitable distribution state, such as Florida, you may find yourself on the short end of things when the final decision is made regarding your assets, including retirement income you need for the future.
The Law Office of Eric C. Cheshire has more than 25 years of experience handling all aspects of a divorce, and equitable distribution, and we have the resources to help you get the assets you deserve. Please call us today at (561) 677-8090 to discuss your case in more detail.