Dividing Pension and Retirement Accounts in Divorce

Last Updated: January 12, 2023

When couples enter the divorce process, they become consumed with dividing their property. This involves deciding who will get the house, cars, personal belongings, and cash. Division of property extends to pensions and retirement accounts held by both parties. Dividing retirement accounts in divorce is a complex process. Obtaining assistance from a financial advisor and an expert lawyer for marital property division is recommended–and lawyers provide free consultations to discuss these issues in depth.

Division of Retirement Accounts in Divorce

Retirement savings can represent a large portion of the assets accumulated during a marriage. In many instances, it is the largest asset for a long-term marriage seconded only by a paid off house. Pensions, 401(k) plans, IRA’s, 403b’s, deferred compensation plans, and other retirement accounts provide people with financial security once they stop working. The fact that they affect the future of a divorcing couple makes dividing retirement accounts in divorce very important. If the parties do not agree on a method for splitting retirement assets, a judge will do so. When this happens, having an experienced attorney on your side is highly recommended.

Who Gets What % of Retirement Accounts in Divorce?

Retirement accounts accumulated during a marriage are usually considered marital property. Even if only one spouse contributed to or received money to fund these accounts, the balances may be split, with each party receiving 50 percent of the marital portion. In the case of pensions and some other retirement plans, a qualified domestic relations order, or QDRO, may be required. This court order informs retirement account administrators of how benefits should be paid to the non-employee spouse following a divorce. With a QDRO in place, tax penalties of fund withdrawal and separation are reduced or eliminated in their entirety.

When a QDRO is used to transfer liquid accounts (401k, IRA, or deferred compensation accounts), the potential tax liabilities associated with an early withdrawal are eliminated. The spouse that is receiving their portion of the marital funds will have an IRA opened in his/her name and the paying spouses ‘fund administrator’ will make a direct transfer into that new accounts. The reason for this is because funds from non-Roth investment accounts are not yet taxed. If the receiving spouse gets a big portion of those funds in the form of a check, they would need to pay income taxes on the whole amount (and possibly an early withdrawal penalty too). When retirement accounts in divorce are going to be divided, a divorce lawyer typically hires a specialist to assist in the valuation and eventual distribution of those accounts even.

Different Laws in Different States

Some states have laws regarding pension division and the required calculations can be very complicated. Divorcing couples may be allowed to negotiate which division method to use and this may result in distribution being delayed until the pension matures. Some states permit delay of both division and the percentage determination until pension maturity.

How the Percentage of Retirement Accounts in Divorce is Done

Ordinarily, the formula for dividing retirement accounts in divorce looks something like this:

Marital Portion of the Pension = Number of years married WHILE ALSO being employed/total number of years employed. The number of years worked might be unknown if the spouse is still working, so a pension pan gets the QDRO order and holds onto it until that employee retires. Once he/she retires, the pension fund administrator is able to fill in the numerator of the fraction. The division of retirement accounts in divorce is complicated, even though some simple math looks to be all that is needed (it is not simple!).

Here’s an example: Wife works for the City for 5-years before being married. She then gets married and works for another 15-years for the City but gets divorces from husband. Wife works 10-more years for the city and retires. What portion is marital (and thus, subject to division? Well, the denominator of the fraction is total number of years worked for the city, so it’s 30. The numerator is number of years worked while also married, so it is 15. 15/30 = 50% marital, and husband is due 50% of the marital portion of the pension.

Buy-Out Provisions and Trades

With pensions, some courts may award the entire account to the employee-spouse and require this individual to buy out the interest of the non-employee spouse. This eliminates the need for ongoing involvement of courts until benefits are received upon retirement. Distribution method aside, valuing retirement accounts in divorce is an important step that can have long-term implications.

Next Steps

An attorney specializing in divorce and property division will ensure that retirement accounts are valued correctly. Because this is probably the largest asset in the marital estate (for a long-term marriage), dividing retirement accounts in divorce the right way is necessary. If a QDRO is issued, the lawyer will verify that this complies with the law and is executed correctly. Clients will receive the retirement benefits to which they are entitled, allowing them to live comfortably during their golden years. Only an expert divorce attorney can let you know what your options are, and speaking with one that provides a free consultation is oftentimes your first step to learning your rights and getting what you deserve.