Divorce: How to Divide Your Retirement Plan
Last updated on 05/28/2021 at 4:35 pm
How do I start?
A good place to begin is find out what kind of property your retirement plan is.
Is it property that belongs to both of you? Did you buy it or earn it during your marriage? If so the property probably belongs to the marriage. This is marital property.
Is it property that belongs to just you? Did you buy or earn it before you were married? Did you earn or buy it after you and your spouse separated? This is separate property.
Is your retirement plan Marital Property?
- Marital Property v. Separate (personal) Property.
In West Virginia, the idea is pretty simple. Property and assets owned before the marriage are separate property. Anything gained during the marriage is marital property.
- Personal Property gained in the marriage.
Items you get during your marriage are not always marital property. Some items you get while married could be separate property:
- Items you treat completely as your own*,
- Items both parties agree are not marital property,
- Items that have been bought or traded with separate property gained before the marriage,
- Personal gifts you are given,
- Items you get while married, but after separation,
- Value your separate property earns without you or your spouse’s efforts.
*Please note that this means for the entire time, or most of the time that you have item. Treating the item as your own after deciding to divorce would likely not be enough.
Generally, money you put into your retirement while you were married will be considered marital property. The money put into your retirement before the date of your marriage, and after the date of separation would be separate property.
For example: You have worked at your job for the last 10 years. You have been married for the last 5 years. During the first 5 years of your job when were not married, the money put into your retirement account would be separate property. However, from the day of the marriage until the end of the marriage, earnings into your retirement account would be considered marital property. Say you put in 1,000 a year for retirement, the $5,000 earned during the first five years would be yours. The $5,000 earned during the marriage would be marital. While WV Courts try to fairly split property to both parties, retirement plans are generally split evenly down the middle. This means that the $5,000 that is marital property would be halved and $2,500 given to both of you.
How is Marital Property divided in divorce?
West Virginia is an equitable distribution state. This means that instead of totaling up the value of all marital property and splitting it 50/50, the Courts look at a lot of things. They take current income and possible income into account. The Court will also look at education, work history, and what each person gave to the marriage. After looking at these items and more, the Court will divide the value of the marital property and split it so that both spouses are left with a fair amount of property. It should be noted that fair does not always mean equal or half.
For example: One spouse remains unemployed and cares for the home, property, business, children, etc. The other spouse makes all or much of the income. The non-working spouse may get more than the working spouse after the divorce. While this may not sound fair, the Courts look at each spouse’s contributions to and during the marriage as well as their earning potential, or how much money they do or can make, after the marriage ends. In the example mentioned above, the non-working spouse may not be in a position to get a job, after having not worked for some time. Also, the non-working spouse may have given up continuing their education or career advancement to care for the home. Further, the non-working spouse likely provided the environment and ability for the working spouse to maintain and advance in his or her chosen career field.
For information about what relief you can ask from the court and divorce proceedings, please visit our Divorce Toolkit.
What kind of retirement plan do you have?
The first step in dividing your retirement, is finding out the details of your retirement plan. The most common types of retirement plans are IRAs, 410(k), and Pensions. Each type of retirement will have its own set of guidelines to follow in the event of a divorce.
- An IRA is an Individual Retirement Account. An IRA can be opened by practically anyone who can show that they have an income. This is generally not a retirement plan offered by an employer. However, anyone may contribute to your IRA. And, you can set up your plan to collect money from your paycheck.
There are two basic types of IRAs, Traditional IRA and Roth IRA. A traditional IRA offers a tax break for the tax year when the money was put in but you will have to pay taxes on the money when it is withdrawn. A Roth IRA lets you put in money after taxes have been taken out so you do not have to pay taxes when you take the money out at retirement.
These differences only impact the amount of money you will have available at retirement. Both types of IRAs are divided the same way in divorce.
- A 401(k) or 403(b) are retirement savings plans opened by an employer. It lets workers save and invest some of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
There is also a Roth 401(k). The only difference in a Roth 401(k) and a traditional 401(k) is when taxes are paid on the money in your retirement account. Both are divided the same way at divorce.
- Pension Plans are retirement plans that require an employer to put money into a pool of funds for a worker’s future benefit. The pool of funds is invested on the employee’s behalf. The earnings on the investments create income for the worker upon retirement. Employees who have pension plans through an employer must stay with the company for a certain period of time before they are entitled to their pensions. This is called vesting. An employee may be partially or fully vested in their pensions. A person may withdraw money from their pension plan once they reach the age designated by their plan. This is usually between 60 and 65. Specifics about your pension plans vesting and maturity dates will be unique to each plan. You should contact your employer or plan provider to find out this information.
How to divide an IRA:
Dividing an IRA can be a straight forward process. The biggest thing to remember when dividing an IRA, is to wait until after the divorce has been finalized. Generally, there are two ways to remove money from an IRA, withdraw and transfer.
You can withdraw money from your IRA at any time. However, if you withdraw money before you are 59 ½ years old, you will have to pay a 10% tax penalty. Transferring the money ordered is generally the better, least taxed option.
Transferring (often called a “rollover”) is the process of taking money from one IRA and putting it into another IRA. When money from an IRA is transferred after a divorce because of a court order, this is called a transfer incident to divorce. When done like this, no money is actually withdrawn from the IRA to be used. The money is either being divided into two (2) separate IRA accounts, or the name of one account holder is being changed. You must have court order issuing divorce or the separate maintenance of property and the division of retirement benefits in order to transfer without penalty.
Money withdrawn directly from an IRA and distributed to your ex-spouse can suffer an additional tax penalty. If your ex-spouse does not have their own IRA, they can set one up in order to receive their portion of the retirement benefits. Once that money is in their own IRA, they will be subject to same type of early or late withdraw penalties.
Step by step instructions on splitting an IRA by transfer:
- Get a divorce order signed by the judge that grants a transfer incident to divorce.
- Contact your retirement plan provider to get a transfer incident to divorce form.
- Fill out the form as completely as possible. Be sure to read the entire form. It is likely that you will be required to attach a copy of the divorce order to the transfer form.
- Submit the form to your provider within a year of the divorce order.
- Your IRA provider will transfer to the money to the other party’s IRA account.
If your provider does not have a form, ask what specific information they would need in order to allow the transfer to go through.
How to divide a 401(k) or a 403(b):
Dividing a 401(k) requires a little more than dividing an IRA. While you still need a divorce order from a judge, you also need a Qualified Domestic Relations Order, or QDRO. A QDRO is a legal document that explains the proper way to divide your 401(k).
While there are many examples of QDROs online, your retirement plan provider must accept the QDRO you propose before the Judge can sign it. It is strongly recommended that you find an attorney to do or help you with this portion.
If having an attorney is not an option, contact your retirement plan provider and request a QDRO – sometimes the plan provider will have a blank QDRO that meets their own criteria, as well as the courts. If your plan provider does not have a QDRO to send you, ask if they have specific requirements or guidelines that you need to follow in order to get your QDRO approved.
How to divide a Pension Plan:
Pension Plans also require a divorce order and a Qualified Domestic Relations Order, or QDRO. However, pensions require vesting before the beneficiary can claim their benefits. A pension plan vests when the employee has worked for the employer for a length of time they agreed to before. After a pension plan vests, the employee will have full or part ownership over the funds in that plan, depending on the plan’s details. Before the pension plan vests, the employee will not have access to money that has been put into the pension plan. Because there are many levels to pension plans, each case is unique. The court will give the final order on how it would like the pension to be divided.
If a Pension Plan has vested but the plan holder has not reached the age of maturity, there are two (2) general ways a court may decide to divide the pension plan.
1. Ordering the offset of the present value of the plan. What this means is the court will give the pension plan a current value. Next, the court will take that current value and find out how much of it was earned during the marriage. The court will divide that total in half to determine the amount owed to each spouse. Because pensions are usually not able to be withdrawn until a certain age, the court will order property totaling the amount that would have been received from the pension plan. This additional property is supposed to offset the value of the pension plan that was earned during the marriage.
2. The deferred distribution method. Pension plans are designed so that the plan holder has a source of income after retirement. This can be done by receiving monthly payments until death or a lump sum at maturity. The deferred distribution method allows the non-pension holding spouse to receive a fixed percentage of that money after the plan matures. The fixed percentage is decided based on the time the pension plan holder worked for the company while married.
If having an attorney draft your QDRO is not an option, contact your plan provider to get an acceptable QDRO. If they do not have a QDRO, ask for the criteria your plan provider needs on a QDRO for it to be accepted.
How do I get information about my retirement benefits?
If your retirement benefits are being divided, the easiest way is to call your plan provider. They will be able to give you the specific information you need regarding your account.
If the retirement benefits being divided belong to your spouse, you can request the information of his or her retirement accounts be produced during the discovery process of your case. Discovery is the process of requesting information from the other side that is necessary to the case. If you do not have an attorney to help you with this matter, you may ask the court to order the other side to produce the necessary information regarding their retirement accounts before your final divorce hearing.