Dividing assets that you and your spouse own is already very difficult during a divorce, with there being a process of assigning a value to each item so it can be divided. However, things become even more challenging when you are trying to discuss future assets like retirement income. Here is what you need to know about how it works to divide these assets that won't be available until the future.
Qualified Domestic Relations Orders (QDRO)
A problem that you'll have with any retirement account is that the funds cannot be withdrawn without triggering some additional penalties, such as with 401(k)s or Roth IRA accounts. Thankfully, there is a process that helps with this specific problem known as a QDRO. It allows a portion of a retirement account to be transferred to a spouse without triggering a withdrawal, which would normally bring tax consequences and penalties along with it. The proper paperwork must be filed to ensure that this process is done correctly.
Division By Percentage
It is common for retirement accounts to be divided by a specific percentage rather than a dollar amount, which can make the process less confusing. If a retirement account started and ended during the marriage, then it is very easy to assign a 50/50 split to the account. Half of the funds are withdrawn with a QDRO and placed into a new account for the other spouse, where that money can continue to grow with the same tax benefits as the original retirement account.
Percentages are often used to separate funds in an account that were there prior to marriage. For example, one person may have a 15-year-old retirement account that was started 5 years prior to the marriage. Rather than look at the contributions of each year and how earnings may have compounded, percentages are used to make it easy. 33% of the account would belong to the person that started the account, and the remaining 66% would be split between the couple.
Division by Lump-Sum Buyout and Deferred Distribution
Sometimes retirement benefits are not as easy to divide, such as pensions that do not have a physical account that can be divided. Either lump-sum buyout or deferred distribution can be used in this type of situation.
A lump-sum buyout is when the person with the pension pays their spouse a lump sum based on what they feel the pension is worth today. This allows the person with the pension to receive their pension in full once they become eligible. However, it is not always possible to buy out a person's share of the pension due to a lack of cash on hand at the time of the divorce.
Division by percentage may be used to determine how much of the pension would go to each spouse, and then deferred distribution takes place. This is when a percentage of each pension payout is divided at the time of retirement. For more information, contact a family law attorney near you.