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Getting a Divorce? Protect Your Retirement Assets to Secure Your Future
Written by: Megan Dell
Retirement assets are among the most valuable assets acquired by couples during their marriage, especially if they have a long-term marriage. If you or your spouse has a 401k, 403b, IRA, TSP, or pension, read on to understand how you can benefit from these assets even if you are not the account owner.
Types of Retirement Accounts and Retirement Assets
There are two main types of retirement accounts: defined contribution plans and defined benefit plans. How to split retirement accounts during divorce is often affected by the type of retirement plan.
Defined Contribution Plans
Defined contribution retirement plans are employer-sponsored retirement savings plans where employees, and often employers, contribute to individual accounts. The eventual retirement benefit is not predetermined but depends on the contributions made and the investment performance of those contributions. Defined contribution plans can include:
401(k) Plan: The 401(k) plan is one of the most well-known defined contribution plans in the United States. Employees contribute a portion of their pre-tax salary to the plan, and many employers offer a matching contribution up to a certain limit.
403(b) Plan: Similar to a 401(k), a 403(b) plan is offered by non-profit organizations, such as schools, hospitals, and religious organizations. Employees can make tax-deferred contributions, and employers may offer matching contributions.
457(b) Plan: Government and non-profit employees, such as state and local government workers and some non-profit organizations, can participate in 457(b) plans. These plans allow employees to contribute a portion of their salary on a tax-deferred basis.
IRA (Individual Retirement Account): IRAs are not employer-sponsored but are personal retirement accounts that individuals can open on their own. They come in two main types: Traditional IRAs, where contributions may be tax-deductible, and Roth IRAs, where contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.
SIMPLE IRA (Savings Incentive Match Plan for Employees): These plans are designed for small businesses with 100 or fewer employees. Both employers and employees can make contributions to SIMPLE IRAs. Employers can choose to either match employee contributions or make a fixed contribution.
SEP IRA (Simplified Employee Pension IRA): SEP IRAs are typically used by self-employed individuals and small business owners.
Solo 401(k): Designed for self-employed individuals or business owners with no employees (other than a spouse), a Solo 401(k) allows both employer and employee contributions.
Thrift Savings Plan (TSP): The TSP is a retirement plan for federal employees, including members of the military. It functions similarly to a 401(k) plan and offers various investment options.
Profit Sharing Plan: In a profit-sharing plan, employers make discretionary contributions to employees’ retirement accounts based on company profits. These contributions can vary from year to year.
Each type of defined contribution plan has its own rules, contribution limits, and eligibility criteria. Additionally, employer may “match” a percentage of contributions by the employee.
Defined Benefit Plans
Defined benefit retirement plans are employer-sponsored retirement plans that promise employees a specific benefit upon retirement, usually based on a formula that considers factors such as salary and years of service. There are several types of defined benefit retirement plans, each with its own characteristics. Defined benefit plans can include:
Traditional Pension Plan: This is the most common type of defined benefit plan. It provides retirees with a regular, predetermined monthly benefit based on a formula that considers factors like salary history and years of service.
Cash Balance Plan: In a cash balance plan, employers contribute a specific percentage of an employee’s salary to a hypothetical account. This account grows with interest over time, and employees receive the accumulated balance as a lump sum or an annuity upon retirement.
Multiemployer Pension Plan: These plans are typically used in industries with many employers, such as construction or transportation. Multiple employers contribute to a common pension fund, and employees can move between employers without losing their pension benefits.
Government Pension Plans: Government employees often have access to defined benefit plans provided by state or local governments. These plans are designed to provide retirement benefits for public sector workers.
Church Plans: Certain religious organizations offer defined benefit plans for their employees, and these plans are exempt from some federal regulations.
Union Plans: Labor unions may offer defined benefit plans to their members, which are collectively bargained with employers.
SERPs (Supplemental Executive Retirement Plans): These plans are designed for top executives and provide additional retirement benefits beyond what is available through traditional defined benefit plans or 401(k) plans.
The specifics of each plan can vary widely, including contribution amounts, vesting schedules, benefit formulas, and eligibility criteria. Defined benefit plans have become less common in recent years, with many employers favoring defined contribution plans due to their lower cost and administrative simplicity.
Hybrid Retirement Plans
Hybrid plans combine elements of defined benefit and defined contribution plans. They often provide a minimum benefit like a traditional pension while allowing employees to contribute to a retirement account like a 401(k).
Similarly, Keogh plans, also known as HR10 plans, are retirement plans for self-employed individuals and unincorporated businesses. They offer both defined contribution and defined benefit options.
Are Retirement Assets Protected from Being Divided in Divorce?
The funds in your retirement accounts, and the other investment accounts in your spouse’s name, may be your biggest assets acquired during your marriage.
Except for military pensions — which are handled completely differently from other assets — retirement assets are not subject to any special protection from being divided in a settlement agreement or divorce proceedings.
Even retirement accounts held in one spouse’s name (instead of titled jointly) are likely subject to equitable apportionment if (1) the accounts were established during the marriage, or (2) marital funds were deposited during the marriage.
Basic Rules of Property Division Applied to Retirement Savings
Although some specific rules may apply to a retiree’s retirement account, the basic rules in the divorce process still apply for the same assets. As we have detailed before, South Carolina is an equitable distribution state for division of marital assets and debts.
1. Identify All Retirement Assets Held By Each Spouse
The first step for accomplishing an equitable distribution of assets and debts is to identify all of the assets — including retirement benefits — each spouse owns.
Even if you believe your own retirement account is separate property, you must identify the existence of the account. S.C. Code Ann. Section 20-3-620(b)(7) provides the “nonmarital property of each spouse” is a factor when dividing the marital estate.
Does It Matter if the Retirement Benefits Have Not Yet Vested?
In South Carolina divorces, there is no meaningful distinction between matured and unmatured retirement benefits. Kneece v. Kneece, 296 S.C. 28 (Ct. App. 1988). Both vested benefits, and unvested benefits, are subject to equitable division.
2. Determine Which Retirement Assets are Marital Property
The general rule is that “marital property” is all real and personal property acquired by the spouses during the marriage and owned by them as of the date of filing or commencement of marital litigation, regardless of how legal title is held. S.C. Code Ann. Section 20-30-630(A).
All Wages Earned During the Marriage are Marital Assets
Therefore, when one spouse deposits a portion of their earnings (which are marital property) into a retirement savings account, those funds remain marital assets. And when an employer matches the employee’s contribution to their retirement plan, then the funds contributed by the employer are also marital assets.
Usually Retirement Accounts Established During the Marriage are Marital Property
In many cases, it is a reasonable assumption retirement accounts established during a couple’s marriage will be considered marital property. The strength of that assumption varies based on the particular circumstances of the parties’ marriage, including how long they have been married, and how long each spouse has had the same employer.
The Difference Between the Retirement Account and the Funds In the Account
When addressing retirement savings, it is important to distinguish between the “retirement account” and the “funds” within the account.
If one spouse begins their employment with ABC Corporation before getting married, then the 401k account provided by ABC Corporation is, generally, considered non-marital property.
However, if the spouse continues to work for ABC Corporation after getting married, and continues to deposit funds into the account, then the funds contributed during the marriage are marital property subject to division.
Then, if the spouse continues to work for ABC Corporation after the couple decides to divorce and marital litigation is filed, any funds contributed to the 401k after the date of filing are likely to be considered separate property not subject to division.
So if one spouse has changed jobs multiple times before or during the marriage and/or rolled the value of one retirement account into a comparable retirement account with a different employer, then the character of the funds within the retirement plans may be harder to determine.
Funds Contributed Pre-Marriage May Be Non-Marital Assets
As described above, a spouse may choose to transfer funds from a pre-marital, separate retirement savings account into a retirement plan with a new employer, which is presumed to be a marital asset.
Or, with defined benefit pensions, an employee may have started contributing to the plan prior to the marriage and continued to do so after getting married.
Ultimately, a spouse claiming an interest in the other spouse’s retirement plan must present evidence of the value of the retirement plan at the time of the marriage and at the time of the filing of the action. Calhoun v. Calhoun, 331 S.C. 157 (Ct. App. 1998). Likewise, if the spouse who contributed funds to a pre-marital retirement account during the marriage claims the pre-marital contributions are non-marital, then that spouse bears the burden of proving the pre-marital value. See Wilburn v. Wilburn, 403 S.C. 372 (2013).
Transmutation of Retirement Funds from Separate Property to Marital Property
The nature of separate property can be changed so the asset becomes marital property subject to equitable distribution. The process of changing separate property to marital property is referred to as “transmutation.”
If we continue the example above:
If, during the marriage, the spouses decided to take a loan against the premarital 401k account and then repaid the loan with the owner’s earnings, then — because the loan was repaid with marital funds — the entire account may be determined to be transmuted to marital property.
Even though the funds contributed to the 401k before the parties got married and after marital litigation was filed could be treated as separate property, in a divorce agreement, the couple could treat all of the funds in the 401k account as if they had been transmuted.
Likewise, if the owner of the 401k could not prove the value of the account on the date of marriage or on the date of the marital litigation being filed, then the Family Court could determine all funds in the account were transmuted into marital property.
Transmutation of retirement savings can also occur when a spouse’s separate funds are deposited into a marital account, or a jointly titled account. It is common for this to happen when one spouse is the beneficiary of a family member’s retirement account or rolls funds from one 401k (established with an employer before the marriage) into another 401k (established during the marriage).
The process of tracing the retirement funds can become very important for identifying the marital portion of the funds and protecting a spouse’s separate assets.
Because it can be difficult to determine whether a retirement account has been transmuted into a marital asset, if there is contribution to a qualified retirement plan or savings that does not overlap with your marriage, you should consult an experienced divorce attorney to ask about transmutation before reaching a divorce settlement.
3. Valuation of Retirement Accounts
After the character of the account and its funds have been determined, like with all the couple’s assets, each specific retirement account must be given a value.
Valuation of Defined Benefit Plans
For defined benefit pension plans, the employee can often request a summary of benefits from the plan administrator. The benefits summary, combined with other information about the employee, can be used to determine an estimated value of the pension. A forensic accountant can be hired to perform a pension valuation for divorce.
Alternatively, to protect against an inaccurate valuation, the employee can agree to give their spouse a percentage of the future pension payments.
Valuation of Defined Contribution Plans
Generally, valuation of a defined contribution plan is more straightforward. However, because withdrawals from these accounts often have tax implications, the need to pay income taxes also must be factored into the valuation.
Transferring Your Retirement Funds to Your Spouse’s Retirement Account
Often, dividing retirement accounts is the most complicated divorce issue. Tax consequences exist and different laws and regulations are applicable. A divorce is one of the only circumstances when a former spouse can get a portion of your retirement account without incurring any tax penalties.
Generally, retirement accounts are subject to an early withdrawal penalty. However, dividing retirement assets in divorce is so common the tax implications are different than other times you might withdraw funds.
Avoid A Tax Penalty When Splitting Retirement Accounts
Early withdrawal of retirement funds has tax consequences and may carry a tax penalty. Luckily, withdrawing retirement funds to divide them with your ex-spouse is not necessary.
Instead, any retirement plan provided by a private employer is subject to federal law and tax implications. When assets in a retirement account are properly transferred from one spouse to another incident to divorce, the transfer does not have tax consequences for either spouse.
The proper way to transfer retirement funds from one spouse to another is a specific court order called a Qualified Domestic Relations Order, commonly referred to as a QDRO. A QDRO is prepared after a divorce decree is entered and details an ex-spouse’s entitlement to retirement savings.
A QDRO directs the retirement plan administrator to transfer funds from the employee’s retirement account into an equivalent account owned by the employee’s spouse. QDROs are typically prepared and signed by the Family Court judge after a divorce decree is entered.
When a QDRO is done properly, neither the employee nor the spouse pay taxes related to the transfer. Instead, the employee’s spouse will have the benefit of allowing the funds to accrue additional value for their future individual retirement.
Get Advice about Retirement Assets From A Financial Advisor
Dividing an IRA account, handling a 401k in divorce, or sharing other retirement accounts for your spouse’s benefit can be the most complex parts of a divorce judgment.
Advice from an experienced family law attorney or financial advisor can help protect your pension, ensure assets and debts are divided equally, and minimize income tax paid by each spouse.
Divorce lawyers can guide you through filing divorce papers, the process of identifying and dividing retirement accounts, and preparing any needed qualified domestic relations order.
Do you feel overwhelmed by the prospect of divorce?