Cincinnati Family Law & Divorce Blog: How Will My Retirement Be Divided?

In a divorce or dissolution, the parties will divide their marital assets. Often, the largest and most valuable assets accumulated during the marriage are their retirement accounts. In dividing these assets, there are a number of important considerations to consider.

First and foremost, retirement benefits are treated differently than other assets because they have different tax consequences. In most cases, the retirement benefits are pre-tax, meaning that once the party receives the benefit or draws from the balance of the account, he or she will pay income tax on that benefit. For this reason, these assets are typically not offset with the value of other assets such as bank accounts or the equity in a residence, or, if they are, tax adjustments will be made. In most cases, the retirement accounts are divided between the parties with separate court orders, such as a Qualified Domestic Relations Order (QDRO) or a Division of Property Order (DOPO). These orders are filed with the court and then submitted directly to the administrator of the retirement plan who would implement the division of the benefit. The way the benefit is divided will depend on the type of retirement plan.

In general, there are three different types of retirement benefits (1) an individual retirement plan such as an IRA (both Rollover IRAs and ROTH IRAs), (2) an employer sponsored defined contribution plan, such as a 401K or a 403B, and (3) an employer sponsored defined benefit plan such as a private pension or a public pension for public employees like teachers.

The IRAs can be divided with a simple IRA Transfer Order. These forms are typically simple and can provide for a portion of the IRA to be transferred into another IRA or to be withdrawn. If the funds from the IRA are withdrawn by a party, that party will have to pay income taxes on the amount withdrawn and may have to pay a penalty if the withdrawal is prior to age 59 ½.

Most employee sponsored retirement plans can be divided by a Qualified Domestic Relations Order (QDRO). The QDRO may instruct the plan to transfer the retirement funds into a new account, into another IRA or to be withdrawn. With a QDRO, if the party chooses to withdraw the funds, he or she will still be required to pay income taxes on the amount he/she receives, but there is no penalty for the early withdrawal.

For the defined benefit plans, a QDRO or a DOPO is typically required to divide these benefits. These orders will divide the retirement benefit and distribute the benefit at the time of the parties’ actual retirement. This will traditionally result in a payment to the spouse for his or her lifetime, rather than a lump sum payment. For example, if Husband earned a pension benefit of $1000 per month during the marriage, the Court could order that a QDRO be entered, granting Wife 50% of that marital benefit. Later, when Husband and Wife retire, the plan administrator of Husband’s pension will have a copy of the order on file and will pay to Wife $500.00 per month of Husband’s benefit. Husband would then receive the other $500.00 monthly benefit that was earned during the marriage, plus any other benefit that he earned after the divorce.

Overall, it is important to understand that each and every retirement plan is different and they all have specific requirements regarding the division of its benefits. Therefore, the parties and their attorneys must gather all the necessary information to determine how the plan should be divided based on the specific facts involved in that case.