Retirement Accounts in High Asset Divorce Settlements

 Posted on June 24, 2015 in High Asset Divorce

With the possible exception of the marital residence, a retirement account is typically the largest asset in a high net worth divorce. After years of saving and planning, it can be quite disconcerting to learn that a retirement nest egg is divisible just like any other marital asset. But, from both a legal and practical perspective, both spouses have made contributions to this account over the years, either by investing money in the plan or investing time in the marriage.

Most employer-sponsored plans, like a 401(k) or pension, require a Qualified Domestic Relations Order (QDRO); many IRAs can be divided without a QDRO. Many government-sponsored plans, most notably military retirement accounts, require a Division Order (DO), which is similar to a QDRO.

The Formula

In a typical 401(k) or other defined contribution plan, meaning that the level of benefits is tied to the plan's monetary value, a court will divide the portion of the account that is community property.

Assume that wife is a 20-year employee of XYZ Company, and she is divorcing husband after a 10-year marriage. If her 401(k) is worth $100,000 at the time of divorce, husband is theoretically entitled to $25,000, or half of half the total value. In most cases, the divided amount is based on the plan's value at the time of separation.

Most plan administrators have their own forms. It is important that the QDRO be in the correct format; otherwise, the plan administrator is prohibited by law from distributing money to the alternate payee.

Practical Considerations

An offset may be appropriate in some cases. In the above example, husband might take $15,000 in exchange for a greater share of the remaining community property.

An alternate payee can typically choose several distribution methods:

• Single Account: Husband would leave his share in wife's account, and begin receiving monthly payments when she retires or is otherwise entitled to disbursements. This is the simplest approach; however, husband cannot make his own contributions to the account, in most cases.
• Separate Accounts: Although there is more paperwork involved, husband can remove his money from wife's account and place it in his own IRA.
• Cash Disbursement: Husband can elect to "cash out" of the account; early withdrawal penalties normally do not apply, although the IRS will claim its share.

A QDRO or other retirement division is a significant component in most high asset divorces. For a consultation in this area, contact an aggressive Round Rock high asset divorce attorney.