Seth Eric Springer, Esq.
How Do I Protect My Retirement in a Divorce?
Divorce is never easy. Apart from the emotional turmoil of losing someone who was supposed to be a partner for life, there are also other issues to consider. Separation can involve alimony payments, a possible custody battle, and of course, the division of marital assets.
Assets usually refer to marital property, such as cars, homes, real estate, furniture, and any businesses the spouses may own. However, they can also include different financial instruments like cash balance accounts, savings accounts, defined contribution pensions, 401 (k) plans, and other retirement packages.
A commonly held belief is that a retirement plan belongs to an individual. However, it can be classed as marital property and divided between spouses during a divorce. Since a retirement fund is a safety net people need when they reach their sunset years, many wonder how they can protect their retirement in a divorce.
The answer is complicated and largely depends on where the divorcing couple lives. Nevertheless, with the right strategy and legal counsel, there are a few steps a person can take to safeguard their pension during a divorce.
How a Court Divides Retirement Funds
Divorce is a complex procedure, and it doesn’t look the same in every county. Different states have different divorce laws, and there are many factors that will influence how a court divides marital property.
Types of Retirement Funds and Their Value
There are two basic types of retirement plans — defined benefit plans and defined contributions.
1. Defined Benefit Plans
These types of plans involve employers contributing either fixed monthly amounts or lump-sum payouts to the plan until the person retires. These include pension plans and cash balance plans.
Dividing benefit plans is tricky because they’re only payable in the future. Therefore, it's hard to gauge the value they’ll accrue over time. So, courts will usually estimate their worth by looking at the spouse’s salary, years of employment, and life expectancy. Afterward, they will use deferred distribution or immediate offset to divide the funds.
Deferred distribution involves splitting the plan’s value either when it reaches a certain age or at the point of retirement. When it comes to immediate offset distribution, courts allow the participant spouse to keep all the retirement funds only if they can pay their former spouse’s share of the pension.
2. Defined Contribution
Defined contributions are easier to divide during a divorce. These tax-deferred plans involve employees setting aside a percentage of their paycheck and the employer matching a percentage of the employee's contribution. Individual retirement accounts, a 401(k), 403(b), and profit-sharing plans are classed as defined contributions.
Determining how much a defined contribution is worth involves subtracting the value the plan had on the marriage date from the value it had on the separation date. Following this, a judge will order the participant spouse to distribute a portion of their retirement account to their spouse.
Value alone doesn’t determine how much each spouse can get from the retirement fund after a divorce. Depending on what distribution model the couple’s home state uses, other factors will also play a role.
For example, courts in Pennsylvania use equitable distribution when dividing marital assets. This means the court divides properties and funds based on what they believe is a fair distribution of property.
Determining what’s ‘fair’ in PA depends on several circumstances such as:
● The length of the marriage
● The health, age, and income of both parties
● The standard of living during the marriage
● How much value the couple’s individual assets have
● Potential tax liabilities
● What role each spouse’s played in acquiring the assets
● The economic circumstances for each spouse
Some couples who file a divorce together find it easier to make settlements. Find out how long a joint divorce takes.
How Do I Protect My Retirement in a Divorce
Sometimes, the court’s idea of fair distribution doesn’t align with what individuals believe they should get. Therefore, many wonder if there is a way to protect their share of the assets. The first and safest option is a prenuptial agreement.
A prenuptial agreement is a contract that outlines how the courts should handle marital property, custody, and other legal issues in the event of a divorce. Though prenups have negative connotations, it's undeniable that they make divorce proceedings simpler. They’re also a good way to help both parties protect their assets, including their retirement.
However, even in cases where a couple didn't create a prenup, it's also possible to create one during the separation process. Provided that both parties can agree to the terms, divorce lawyers in York can put together a postnuptial agreement to simplify divorce proceedings.
But if a couple can’t resolve issues amicably, then another way to protect retirement funds is a QDRO. A qualified domestic relations order is a document that clearly establishes what rights both parties have, the value of the retirement fund, and exactly how courts should distribute them.
While a QDRO has to meet specific legal requirements, it's the best way to ensure a retirement fund is divided equally.
For those who want to learn how to get a quick divorce, we can also help out.