For individuals 50 years of age and older who are divorcing, it’s unquestionable that retirement accounts, Social Security and pension plans are significant factors in divorce settlement agreements. Even if not approaching retirement, the same can still be true. For various couples, retirement accounts and/or pension plans encompass a significant amount of their net worth and therefore must be addressed in a divorce settlement. The division of retirement accounts is not only complicated but has many tax implications, as well.
There are several important considerations to keep in mind regarding retirement accounts if you are facing a divorce. Generally speaking, retirement funds added during a marriage are treated as marital property. While married, spouses plan for their retirement together. The contributions to a 401K or IRA include funds that couples count on for their future retirement. If a spouse enters the marriage with funds already in a retirement account, those funds are considered separate property.
Marital vs. Separate Property
Marital property includes property that is considered in the division of assets and liabilities during a divorce. It consists of all income and assets acquired by either spouse during the marriage. In many states, if separate property increases in value during a marriage, the increase in value is considered marital property. Some states differentiate between active appreciation and passive appreciation when determining whether the increase in value is considered marital property or separate property.
Separate property, on the other hand, is not considered in the division of assets during a divorce. In states that differentiate passive and active appreciation of assets acquired before the marriage, the passive appreciation is typically separate property.
Division of Retirement Accounts
The courts adhere to procedures when dividing retirement accounts determined to be marital property. There are federal guidelines when dividing funds from a 401K or similar plans, however state law dictates how IRAs are divided.
Divorcing spouses can agree in a divorce settlement as to how they want these assets split and transferred. However, if the divorce settlement agreement states that a pension or 401K plan will be divide,d a court must order a qualified domestic relations order (QDRO). A QDRO is not necessary to divide an IRA. Many military pensions, federal, state, county and city retirement plan benefits also have their own rules regarding division upon a divorce. The QDRO instructs the plan administrator as to how the non-employee spouse will be paid their share of the plan benefits. The QDRO allows the funds from the retirement account to be separated and withdrawn without penalty and paid to the non-employee spouse’s retirement account.
Teacher retirement funds (TRF) in Indiana are exempt from the QDRO procedures. In addition, Indiana pension law exempts TRF benefits from legal process, seizure or levy due to a member’s transfer of payment as void by statute, negating alternative payees.
Legal Representation
If you are facing divorce and you or your spouse holds retirement accounts, it is important to understand how these assets will be divided. Depending on the type of retirement account, federal and state law may affect the outcome.
Attorney Chris L. Arrington is an experienced divorce attorney in Danville and surrounding counties who can help you through a divorce. Contact our office today to discuss how we can help.