High asset divorces typically involve many different types of assets which need to be allocated or otherwise divided. Generally, this includes retirement accounts. Retirement accounts are most commonly 401(k) accounts or Individual Retirement Accounts (also known as “IRAs”). Occasionally, they will involve a pension, which is another type of retirement account. In the divorce settlement or at trial, these types of accounts have to either be allocated to someone or divided.
Types of Retirement Accounts in High Asset Divorce
Depending on the type of account, the division may involve the offset of accounts against each other and then just one lump sum transfer from one account to another account so as to achieve the division, rather than dividing up each and every account. This is because there are certain orders required to divide these accounts pursuant to a divorce, called Qualified Domestic Relations Orders (or, “QDRO’s”). It can be expensive to draft many QDRO’s to divide each and every account, so an offset often makes good financial sense, as it conserves assets to only have to draft one order.
The 401(k) accounts are most often divided via a QDRO. The QDRO typically partitions out the portion of the 401(k) account which will be awarded to the non-holding spouse (also called the alternate payee). That portion rolls into an IRA account newly established for this purpose. The alternate payee can then manage the IRA account as they see fit. The rolling of the assets from the 401(k) account to an IRA keeps the transaction tax-free and penalty-free. Some plans also allow the alternate payee to take a lump sum benefit from the 401(k) as cash. However, this transaction will be taxed at the alternate payee’s tax rate for that tax year. The usual 10% penalty, though, is often waived. This is a way for someone to obtain cash to pay off debt or invest, but because of the penalty, it is often a good idea to talk to a financial advisor before making any such decision to see if it makes sense for you.
IRAs are typically a bit easier to divide. Usually, an IRA can be rolled over from one party to another, into another IRA account, via a normal court order, without tax consequences. A specialized qualified order could be necessary in some circumstances depending on what the plan requires, but oftentimes just the Judgment for Dissolution of Marriage as a certified copy on its own will permit the transfer. It is always a good idea to speak to your financial advisor regarding what their particular entity or your particular IRA will permit.
Pensions are completely different than 401(k) or IRA accounts because they are not a defined benefit. The benefit received from a pension typically depends on the participant’s years of service and many other factors. Pensions are generally not an issue in a high asset divorce because pension benefits are typically awarded to people who work in more public service types of jobs, such as teachers, firefighters, police, city or state workers, and the like. Some healthcare professionals, such as nurses, may also have a pension. These typically require a special type of order, called a QILDRO, to divide them. The QILDRO is entered at the time of the divorce. However, the actual benefit amount is not calculated typically until the pension earner retires because that is the only time when it is clear how much of their pension is marital versus nonmarital. Usually, to divide a pension in a judgment, the divorce judgment will award the parties a percentage of the marital portion.
For example, a spouse may receive 50% of the marital portion of the pension. That means they would only receive the benefits earned during the parties’ marriage. The earner would retain 100% of their benefits earned before or after the marriage as their own sole and separate property. At the time of retirement, a calculation order is drafted and entered with the court, which directs the plan administrator to pay the non-earning party their earned share.
What About When Benefits Accrue Prior to Marriage and After Separation
It is possible with IRAs and 401(k)s to also have benefits that accrued prior to marriage and subsequent to a divorce. Usually, the parties will draft an agreement that indicates that the earner retains 100% of the non-marital portion of the 401(k) earned before and after the marriage. It is also possible to account for the interest earned on the non-marital portions in the division if the earning party can provide statements showing the balance which was in the 401(k) account as of the date of the marriage. An actuary would typically need to be retained to run the interest calculation, to separate and figure out how much interest was earned on the non-marital portion versus the marital portion. Most of the time, parties don’t bother running these interest calculations and valuations because it can be cost-prohibitive. However, in a high asset divorce, it may be a worthwhile investment to run these calculations.
Additionally, it is always a good idea to consult with your accountant as well as your financial advisor when determining how to handle the division of retirement accounts. They are best equipped to advise you on both current and future tax consequences of your actions in your divorce decree. As high asset divorce attorneys, we commonly work with accountants in addition to financial advisors to ascertain the entire financial picture based upon different settlement scenarios. Diligence is extremely important when dealing with multiple assets and tax consequences, and we often work with a team approach to best serve these particular clients.