Splitting your retirement plans in divorce

Traditionally, the first part of every year is very busy for divorce filings. There is no added legal benefit to filing at that time of year, though many observers think it is most popular because the Christmas holidays have caused an imminent filing to be pushed off.

Of course, 2017 might tip the scales more than usual because of the uncertain economy due to the change to a new president. Because of these uncertainties over the last year, the retirement plan, rather than the family home, has become the largest single marital asset for division in the dissolution of marriage.

A basic understanding of some of the rules and requirements for working through division of this valuable asset can be very useful. Here are some ideas to help you understand some details of division with your soon-to-be ex-spouse.

Dividing retirement plans

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The share of your retirement plan earned during your marriage can be categorized as a marital asset. As an illustration, if you worked for 25 years at a company, participated in the company retirement plan all the while, and were married for 15 of those years, at least 60 percent of the value of your plan would be considered a marital asset and up for division. When the asset is divided, the spouse who is not the plan participant could receive a share of the benefit at retirement or could negotiate the present value of the future benefit of the plan and offset this value against other marital property. These types of plans include 401(k), 403(b), pension, IRA and more.

401(k), 403(b) and pension plans

Dividing an employer-sponsored retirement plan like these requires a Qualified Domestic Relations Order (QDRO) from a court and the approval of the plan sponsor. The plan sponsor is the organization (usually a company or employer) that sets up the retirement plan for the benefit of the organization’s employees and has responsibility for overseeing and managing the plan.

The plan sponsor will have strict rules about divisions of their plan in divorce (as each plan sponsor is different) and will have the final approval in how the agreement is drafted.

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For example, a plan sponsor may stipulate that once the QDRO is final, neither party can receive plan benefits until the plan participant is of retirement age. The sponsor may have specific rules about how benefits will be paid to the spouse who is not the plan participant under various circumstances.

Once both the plan sponsor and the court approve the proposed division of the plan, the domestic relations order becomes “qualified.” The sponsor can show you a sample QDRO for your review and can answer questions and clarify thoughts.

A QDRO then is the legal document approved by the plan sponsor and then by the court, and it is the primary vehicle that will be used to provide survivorship benefits to a nonplan-participant former spouse. It divides the retirement benefits of a work-related retirement plan, or as a vehicle for property settlement it could be used to provide early retirement benefits independently of the participant, or it could compel child support or alimony

As an important practice tip, consider negotiating any retirement plan using percentages instead of dollar amounts. This protects your interests against market volatility and the constantly changing account value of what you are trying to divide.

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Using percentages insures that the spirit of the divorce decree remains intact and avoids the inequity of having one spouse owe the other more than was intended. Also, consider the fact that if you are negotiating for a pension plan the future value of that plan my change due to circumstances. Things such as cost of living adjustments, vesting, subsidized benefits and increased salaries may all add unforeseen value to the plan in the future. A percentage value negotiated will help capture those benefits.

Make sure when dividing defined benefit and defined contribution plans that a QDRO is used. Not using a QDRO when dividing retirement plans may expose the divorcing parties and their attorneys to unforeseen problems including taxes, early-withdrawal penalties and difficulties with unintended beneficiaries, receiving plan benefits in retirement and much more.

For timing purposes your QDRO should be final ahead of your completed divorce settlement and should be drafted by your attorney and financial adviser. If your spouse is the plan participant and remarries, leaves the company or dies before the QDRO is final, it may create a host of problems for you and may be difficult for you to receive benefits you have already negotiated.

IRA and Roth IRA plans

Dividing an IRA or Roth IRA because of divorce does not require a QDRO. Make the transfer of the IRA to an ex-spouse after the divorce is final. If the account owner transfers the IRA before the divorce is final, tax on the distribution and possibly an early distribution penalty might be incurred.

An IRA transfer should be done by direct transfer (trustee-to-trustee). Never take a distribution from the IRA in the form of a check from an ex-spouse or that account owner will be taxed on that distribution.

When part or all of an IRA is transferred, the new owner is deemed the original account owner for his or her share and will inherit the original tax basis as his or her own. Copies of appropriate records should be maintained for tax basis of the original account.

This division process takes time and will have long-term effects on you and your life. Try to be patient. Having a professional team in place may cut down on litigation costs and prevent you from making irreversible blunders regarding your settlement. The team should consist of a divorce lawyer, a family therapist and a certified divorce financial analyst.

Remember: Ensure that you are designing a division of marital assets and retirement plans that address your current and future needs, and enlist the help of your professional team to guide you.

Fred Gartrell, CDFA, AAMS and CRPC, is vice president of private wealth management at

Robert W. Baird & Co. in Fort Worth. FGartrell@rwbaird.com