Divorce involves a great deal more than just adding up the value of your assets and cutting the total down the middle, particularly with regard to retirement benefits. Tax ramifications, costs, your age, and the date of acquisition can skew even the most well-intentioned division and make it lopsided. Federal law intersects with state law to create a complicated picture.
You may not have a right to half your husband's retirement benefits at the time of your divorce. The only portion subject to division is that which accrued during your marriage. For example, if he worked for the same employer and contributions were made to his 401(k) over the course of 30 years, but you've only been married for 20 years, you're entitled to a share of two-thirds of its value. The premarital portion is your husband's separate property. Likewise, you may not be entitled to 50 percent of that two-thirds portion. The nine community property states typically divide the marital portion in half, but the remaining states divide marital property in a way that seems equitable or fair to a judge. If you live in one of these states and a court were to decide the division, several factors might convince a judge to award you more or less than 50 percent of the marital share.
Transferring the Funds
With the exception of IRAs and SEPs, most retirement plans require qualified domestic relations orders – QDROs – to effectuate the transfer of your husband's retirement funds into your name. The Employee Retirement Income Security Act of 1974 prohibits a plan participant's benefits from being diverted to anyone else, but a QDRO overrides this provision. QDROs are complicated documents, tailored individually to plan providers, so you'll have to have an expert draw one up for you. Many lawyers prefer to hire accountants to draft QDROs rather than do so themselves. This can cost several hundred dollars. If you're considering your budget post-divorce, you might want to try to negotiate this fee with your husband as part of your divorce settlement. Typically, however, the cost falls to the spouse receiving the benefits.
Now Vs. Later
Some retirement plans will allow you to cash out your share of your husband's benefits, but others will not. You might have to take the benefits as distributions beginning when either you or your husband reach retirement age. If you're a long way from retirement and you need cash now, such as if you want to buy a home, speak with your lawyer or a financial planner about the advisability of taking a more liquid asset in your divorce settlement rather than one that may not help you for years to come.
A QDRO allows you and your husband to roll over a portion of his retirement benefits without suffering the usual 10 percent early withdrawal penalty. This is true even if you decide to cash out your share and his plan allows it. If you do take the cash, however, it's reportable to you as income in the year you take it. This can bump you into a higher tax bracket, so – depending on other issues – you might want to reconsider how you're going to take the distribution.
Social Security retirement benefits are not marital assets. This isn't to say they can't affect the terms of your divorce in other ways, but federal law doesn't allow the court to divide these benefits and give half to you at the time your husband begins receiving them. Your husband's benefits might affect issues of alimony, however, if you're already at retirement age at the time you divorce. Alimony is usually based on factors such as your husband's income, your need for financial assistance, and the length of your marriage.
- Forbes: How Divorcing Women Should Handle Retirement Accounts and Pension Plans
- JDSupra Law News: Trial Courts May Not Treat Social Security Benefits as a Marital Asset When Dividing Up a Marital Estate
- Bedrock Divorce Advisors: Do You Live in a Community Property State or an Equitable Distribution State?
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.