How Retirement Impacts a Divorce

In Separation & Divorce by Elizabeth Stephenson

Retiring comfortably is the dream for many American couples. We work hard, try to send the kids to college, and make long-term investment decisions so that one day we can stop working and enjoy ourselves. Even if just one spouse was employed, the law views retirement benefits earned during a marriage as marital property. This is because the spouse who made a career sacrifice to manage the home and raise the children allowed the other spouse the opportunity to earn money for retirement.

Valuing and equitably dividing retirement benefits are an incredibly important aspect of the divorce process. This is because retirement benefits generally constitute one of the most valuable assets that make up the marital estate. If you think about your parents or friends who have retired, many primarily live off of their retirement income.

Further, a proper valuation can be complex and highly contested, as there are numerous variables in play. For example, it is important to note that even if the spouse earning the retirement benefits opened their retirement plan before the marriage, the retirement benefits that were earned during the marriage are still considered marital property. To calculate how much of the retirement plan is marital property, simply take the total number of years of marriage (during which retirement contributions were made), then divide that by the total number of years the employed spouse has worked and contributed to that plan.

What are the Types of Retirement Plans?

  • Roth IRA. Roth IRA’s are simpler to value, divide, and distribute than other retirement instruments. This is because the proceeds from a Roth IRA are directly accessible as a total balance from the financial institution, unlike other retirement instruments, which may have monthly payouts. In order to access and distribute the balance of a Roth IRA account, it is only necessary to provide a copy of the divorce order (which details the equitable division) to the financial institution administering the Roth IRA. This does not require a special order.
  • 401(k). Like a Roth IRA, dividing a vested 401(k) is very easy to calculate, as there is a full balance available to the retiree instead of monthly payouts. However, there are significant tax risks if this distribution is not handled properly. This is because a highly specific “qualified domestic relations order” (QDRO) is required to effectuate the divorce order. We would recommend that you seek legal assistance to prepare this order.
  • Fully vested pensions. Known as “defined benefit” plans, pensions allow for employers to contribute fixed percentages of money in addition what employees contribute every month. A cumbersome aspect of pensions is that they cannot be accessed by the employee until they vest. A QDRO is required from the court to order the pensions administrator to directly distribute a fixed percentage of the monthly payment in accordance with the divorce order.
  • Public pensions. Employees of any state agency in North Carolina have public pensions, which are administered by the Department of State Treasurer. The treasurer operates in accordance with a different set of rules than administrators of private pensions. Consequently, a QDRO is not effective for a public pension. Instead a Domestic Relations Order (DRO) is required to effectuate the equitable distribution of a public pension.

Contact New Direction Family Law

Divorce cases can get incredibly complicated. This is particularly true when trying to divide a couple’s nest egg, their retirement plan benefits. New Direction Family Law strives to get things right the first time and help clients attain financial security. For more than two decades, we have assisted clients in North Carolina divorces of all shapes and sizes. Call our team today at (919) 719-3470 to schedule a consultation, or contact us online at our website.