The majority of states treat a retirement account as a marital asset, so they must be divided between the spouses if there is a divorce. In order for the retirement benefits to be fairly divided, it’s essential that you understand how your accounts are valued and divided. Basically, the rules governing dividing retirement accounts can be extremely complicated and they depend on the type of benefit that is being divided. Also, once the division is done, it’s often difficult to change the decision in the future.
Types of Retirement Accounts
There are usually two types of retirement accounts, defined benefit plans, and defined contribution plans. Defined benefit plans are typically company retirement plans, such as a pension plan. Defined benefit plans are determined by the employee’s history of salary and the number of years in employment. They begin paying monthly benefits when you retire and the payments will continue for the rest of your life. A defined contribution plan, also known as a savings plan, is a retirement account in which the employee and/or the employer make contributions into the employee’s retirement account. The most common type of savings plan is a 401K.
How Retirement Accounts are Divided
When dividing a retirement account the first step is determining the current value of your benefits. Should the retirement account be a defined contribution plan, the current value is typically the amount of the money that is in the account as of a specific date. If your retirement account is a defined benefit plan, dividing retirement accounts may be more difficult, because determining the current value is difficult. It is usually recommended that you retain the services of someone experienced in diving of this type of account, in order to make the appropriate calculations. Once the current value has been determined, there are two methods of dividing the retirement accounts: The immediate offset method and the deferred distribution method.
Immediate Offset and Deferred Distribution Methods
With the immediate offset method, the current value of the retirement benefit is compared to the value of some other marital property. The spouse that earned the retirement account keeps the rights to it and in return for waiving their interest to the account; the other spouse gets another marital asset that is of equal value as the retirement account. This method is generally only available if it can be determined what the value of the retirement account is.
With the deferred distribution method, benefits are not divided until they are payable according to the plan, so it’s at a future date. The division of the benefits is put forth in a court order known as a qualified domestic relations order. This order puts into motion the amount each spouse will receive when the benefits become payable in the future. The order is a separately signed order, in addition to the divorce decree.
There are several factors the court will take into consideration when determining the fair division of retirement accounts, including the length of the marriage. For instance, long-term marriages are typically granted a 50-50 split of retirement plans. But, only the portion of the retirement account that was earned during your marriage will be divided. For instance, if your spouse earned some of their retirement benefits before your marriage, the portion they had prior to the marriage is considered separate property and is not included in the division of retirement benefits.