Divorce is a challenging, emotional process. A significant source of contention during the proceedings involves the distribution of assets. Retirement accounts are considered marital assets and may be divided in the divorce decree. The division of retirement accounts depends on various factors including length of marriage and age of spouses. It remains vital to understand the implications of divorce on retirement savings. Therefore, you must retain an experienced divorce attorney to guide you through this complicated process.
Division of Retirement Accounts
Michigan follows the principle of equitable distribution when dividing marital property during a divorce. Equitable means a fair and just division based on various factors including: length of marriage, each spouse’s financial contribution, each spouse’s needs, and other factors. In other words, the division may, or may not be 50/50. In regards to retirement accounts, various types are considered marital property. Any retirement funds acquired during the marriage are subject to division including: 401K plans, Individual Retirement Accounts (IRA’s), pension plans, and other types of retirement savings. Basically, any monies set aside for retirement during the marriage may be split in a divorce.
Who Determines the Division of Retirement Accounts?
Michigan divorce cases use a court order known as a Qualified Domestic Relations Order (QDRO). This order specifies how pension plans and retirement accounts will be divided between spouses. Your divorce attorney will work with experts such as a financial planner, pension analyst, or a QDRO specialist. These financial matters may be quite complicated. For example, consider a couple in their mid-40’s married for 20 years. Perhaps, only one spouse has a pension plan. The other spouse may be entitled to part of that pension plan. However, the spouse with the pension plan will not collect the pension until retirement. As a result, specialists must consider what this plan is worth now, or in the future. So, each spouse needs an experienced attorney to navigate these complicated matters.
Valuation of Retirement Accounts
Determining the value of retirement accounts at the time of divorce is a critical step. The valuation may include assessing the current value of accounts or the future value of pension plans. Each case is different; however, accurate valuation is vital to ensure an equitable distribution of assets. The QDRO will list the value of the following plans:
- 401K Plans- These employer sponsored plans are subject to division in a divorce. A percentage or amount owed to the non-owning spouse will be listed in the QDRO.
- Pension Plans- If a pension was earned during the marriage, it is considered marital property. The QDRO will explain how pensions will be divided. Generally, the spouse with the larger pension may be paying the spouse with the smaller pension. Of course, sometimes one spouse has no pension. In that case, the one with the pension pays the one without the pension.
- IRAs- If the IRAs were set up during the marriage, the funds will be divided according to the QDRO.
Considerations and Challenges
When you file a QDRO there may be tax considerations. It’s important to discuss any retirement withdrawals with your attorney and accountant especially if you are not 59.5 years old. The IRS may charge a 10% penalty for early withdrawal if you do not do this carefully. Also, if you are receiving the money, it’s important to know what to do with it. Once again, your family law attorney may guide you or recommend a good financial advisor. Remember, you must follow state and federal laws. Thus, seeking the guidance of an experienced attorney will protect your financial well-being during this stressful time.