When a marriage ends, it is often difficult and emotional for everyone involved. However, one of the many decisions that need to be made is how to divide the retirement assets and pensions accumulated during the marriage.
This can be a very complicated process, as several factors need to be considered. Many people do not understand the differences and complexities involved in dividing retirement benefits and accounts. Let’s look at how pensions and retirement assets are divided in a divorce, including some key considerations to keep in mind.
What are pensions and retirement assets?
Pensions and retirement assets can include a wide range of account types, such as:
- Roth IRAs
These assets are typically set up to provide income during retirement, which is why they can be valuable assets to divide in a divorce.
How are pensions and retirement assets divided in a divorce?
Pensions and retirement assets are typically divided in one of two ways in a divorce.
The first way is through a qualified domestic relations order (QDRO). A QDRO is a legal document that allows for the division of qualified retirement assets, such as 401(k)s, IRAs, and pensions.
The second way to divide pensions and retirement assets in a divorce is through a lump sum payment. With this method, one spouse would receive a lump sum of cash or other assets from the other spouse in exchange for giving up their interest in the pension or retirement account.
Which method is used will often depend on the specific assets involved and the overall financial situation of both spouses.
What are some things to consider when dividing pensions and retirement assets in a divorce?
Some of the key considerations to keep in mind when dividing pensions and retirement assets in a divorce include the following:
The Type of Retirement Asset
Different retirement accounts can have different tax implications, early withdrawal penalties, and other considerations. It’s important to understand the specifics of each type of account before making any decisions.
The Overall Financial Situation
When dividing pensions and retirement assets, it’s important to consider the overall financial situation of both spouses. This includes factors such as each spouse’s income, debts, and other assets. There may be other assets which can help provide access to liquid funds or the bulk of the marital estate may be tied up in retirement accounts. Every case is a little bit different.
When pensions and retirement assets are divided in a divorce, there may be tax implications to consider. For example, if a stipend is divided through a QDRO, there will usually be no tax consequences. However, if a lump sum payment is made, the spouse receiving the lump sum may have to pay taxes on the amount received. Therefore, in determining the amount of the lump sum the parties may need to make assumptions about the tax impact.
Early Withdrawal Penalties
Another consideration to keep in mind is that some retirement assets may have early withdrawal penalties. This should be discussed with a financial advisor before making any decisions.
It’s also important to consider the future value of pensions and retirement assets when dividing them in a divorce. For example, if one spouse receives a pension with a higher future value, they may give up more in the long run.
Deciding to get a divorce is never easy, but understanding how pensions and retirement assets will be divided can help make the process easier. If you have questions about the divorce process, it’s always best to speak with a family law attorney.
Get Professional Assistance for Your Unique Circumstances
Dividing pensions and retirement assets in a divorce can be complicated, but Aiello & DiFalco can help. Each Garden City, NY, divorce lawyer at our firm has extensive experience handling complex asset division cases.
We treat the division of retirement assets as part of the divorce process. While many law firms treat the distribution of retirement assets as a separate matter, we believe it is too important an issue not to include the submission of QDROs and the division of all retirement assets as a fundamental part of the divorce process.
So if you’re considering divorce or are in the midst of a divorce, contact us today. We’ll review your situation and help you understand all of your options.