Retirement Savings and Divorce
May 18, 2015
Or whose money is this anyway?
Usually the two largest assets for most families are their retirement savings and their home. As more people opt to leave unhappy marriages later in life, understanding the ins and outs of retirement benefits and planning for retirement in divorce is essential.
People generally are living longer after retirement. This new longevity is a double edged sword –especially for the baby boom generation, who may not have planned adequately for either retirement or divorce. The good news is that life expectancy is increasing. A man who retires at age 65 on average can expect to live another 20 years; and a woman on average can expect to live another 23 years. The bad news is that those folks who live longer will need a greater cushion to make sure they do not run out of money in their retirement years. Safety nets such as social security and medicare are designed to provide financial assistance in later life. But the reality is that social security income alone, may not be sufficient for most people.
What Kind of Retirement Plan Do You Have?
If you do not know what kind of retirement plan you or your spouse has, now is a good time to educate yourself. There are a number of different plans and types of plans available. They are simply outlined here as follows:
A Defined Benefit Plan, is where the employer has made contributions over the course of employment, and a specific amount will be provided in retirement. The more common name for this is a Pension. The pension plan is a dying benefit, and reliable pensions have been all but eliminated from most private workplaces today.
Qualified Retirement Plans also known as Defined Contribution plans- The most common of these are 401ks, profit sharing plans, and Keogh plans; The employer makes contributions, but there is no guaranteed or regular annuity type payout.
Non- Qualified plans – these consist of IRAs, SEP IRAs, and executive benefits compensation plans. Contributions to these plans are made by individuals and small business owners with annual contributions up to IRS limits.
What Happens to Your or Your Spouse’s Retirement if You Divorce?
Contributions made to a retirement plan by the employee (and employer) during the course of the marriage and before separation are considered marital property. Growth on the funds during separation also is considered marital property. Contributions made before marriage are excluded from marital property as are contributions made after separation. If you and/or your spouse worked during some portion of your marriage, you are likely to have retirement funds subject to equitable division. How the funds get split has important economic implications for both parties. While a straight down the middle division (or some percentage proportionate split) may seem obvious and like a good idea, it might not be the most tax efficient, nor the most equitable resolution. Choosing whether to keep or split retirement funds can be a complicated decision. Some funds can “rolled over” to a spouse; others may require a court order, known as a Qualified Domestic Relations Order (QDRO). There may be tax penalties also if you roll funds from a qualified plan into a non-qualified plan. Depending upon age, or some other circumstance, a party may wish to have liquid assets “up front” and may wish to exchange a proportion of retirement assets for other assets.
Seek Out Advice
Division of retirement assets and divorce can be somewhat complex. If you are contemplating a divorce, or currently are in the midst of asset division, we recommend that you seek advice from your attorney, tax consultant or financial advisor before deciding what to do with retirement funds. The decision may have implications for the next 30 or 40 years.
For additional information, feel free to call us at 484 431 3959