Asking Your Lawyer the Right Questions Will Simplify the Process
Retirement plans including IRAs, 401(k)s, pensions, and deferred compensation accrued during a marriage are considered marital property in Minnesota. But accounting for their value (both marital and non) and dividing them up can be challenging.
Unlike dividing liquid assets, like the cash in your bank account, dividing retirement plans requires additional guidance. In many cases one or both spouses began their retirement accounts before the marriage so a nonmarital component will have to be considered. Placing value on pensions poses more valuation challenges as they are typically reported as a stream of income by the plan, e.g., upon retirement at age 62, you will get $2,000 per month for life. Pensions often require an expert to value if the parties are not going to divide the future income stream.
Qualified or Non-Qualified
The Employee Retirement Income Security Act (ERISA) and its amendments lays out the difference between qualified and non-qualified retirement plans and has regulations for dividing each. Qualified plans (pensions and most 401(k)s) must be divided using a Qualified Domestic Relations Order (QDRO). This order must comply with IRS regulations, state law, and the rules of the particular plan. It can be one of the more complex family law documents to draft. The QDRO must be signed by parties, the attorneys, the judge, and accepted by the company administering the retirement plan.
Dividing IRAs is generally simpler. Normally, the trustee of the plan has a simple form that the parties can sign. The transfer must be done after the divorce and by a trustee of the original account. If it is not done properly, there may be taxes and penalties involved.
In any of the above types of plans, the receiving party can pull money out or transfer it to an IRA (or even another 401(k) in certain circumstances). Withdrawing money can create taxes and penalties, so it important to speak with your attorney or tax adviser first.
Stock options, while not really retirement assets, are another asset that requires special attention. Stock options granted during the marriage are, at least in part, marital property. The calculation of the marital nature of the asset can be fairly complex as many options, by the terms of the grant, may not be exercisable until well after the divorce. In some cases, it is possible to estimate a marital value and simply use other assets to offset the value.
Is it Worth it?
The complexity of dividing retirement accounts and stock options can be daunting but they are often the family’s most valuable asset (or second after a house). The solutions are many. The accounts can each be divided or often, the largest account is divided so the parties each end up with assets of equal, or equitable value. It is not unusual for two parties to each keep their own retirement accounts, especially if they are close in value. However, it is always important to know the value of all of the accounts, and consider the tax consequences of the accounts, so you can make an informed decision.