Dividing Retirement Accounts in a Divorce
Retirement accounts can be a big part of the process of dividing property in a Florida divorce. However, unlike traditional assets that can just be sold and the profits split, or where parties can just take physical property, a retirement account has specific rules that must be followed in order to make sure that it is properly divided in a divorce.
Marital vs. Non-Marital Property
Retirement accounts are marital property, and are subject to division upon divorce. This is true even if one spouse acquired the retirement account through his or her employment, without any help or assistance from the other spouse.
However, in many cases, only part of the value of the retirement account will be marital property. Any part of the retirement account that accrued, or increased in value during the marriage is subject to division. However, any part of a retirement account that a party owned before the marriage, will generally be considered non-marital property.
Tax Penalties
In some cases, pensions cannot legally be divided, or can’t be divided without a party receiving some kind of tax penalty. This is often the case with governmental employment retirement accounts.
In some cases, taxes can be severe. Taxes can be assessed at the spouse’s current tax bracket, plus 10%. These are numbers that must be accounted for when valuing a retirement account or drafting a QDRO (which is normally done by accountants or tax professionals).
Straight liquidation of retirement accounts will often carry the biggest tax penalties. However, for spouses who may be struggling economically, or in need of funds to start their lives over again, it may be the only option.
Sometimes, a spouse’s share of the other’s retirement need not be liquidated, but rather can be rolled over into the receiving spouse’s own IRAs. This carries the least tax penalties, although withdraw and liquidation will be subject to whatever rules the receiving spouse’s IRA currently has.
The option with the least tax penalties is an offset. The parties may want to value the marital portion of the retirement account, allow the party with the pension to keep it, and make up what is owed to the other party by giving him or her a larger share of another, separate asset.
Using Professionals
As long as the order dividing up the plan (called a QDRO) is drafted correctly, and the spouse receiving funds elects to take the funds at the time that the QDRO is approved, the IRS has a policy that minimizes the tax penalties to the receiving spouse.
Tax professionals may need to be consulted if you do opt to divide up a retirement account, to determine what the tax penalty is. That amount may be equally subtracted from both parties’ share, to make sure they both are paying an equal share of the tax burden (by giving up what they receive from the account).
Our Tampa divorce attorneys at The Pawlowski//Mastrilli Law Group can help you understand how and if your property will be divided by a court in a divorce. Call us with any questions you may have.
Resource:
irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order
https://megajustice.com/lottery-winners-ordeal-demonstrates-importance-of-separation-agreements/
