April/May 1999

Dividing Retirement Assets Upon Divorce

Retirement plans often constitute a material asset to be divided in a divorce. Several approaches that can be used to divide retirement assets (without being currently taxable) are as follows:

Present distribution method

When the participant spouse's benefits are vested, liquid and available for withdrawal, all or a portion of the benefits can be transferred to the non-participant spouse.

Present transfer of equivalent assets method

Under this method, the present value of the participant spouse's benefits is computed with the participant spouse retaining those benefits and an equivalent amount of other marital property transferring to the non-participant spouse.

Deferred determination method

With this method, the court retains jurisdiction until the benefits become currently payable. Benefits are then divided.

Deferred division method

Under this method, the non-participant spouse is given the right to receive all or part of the benefits as an alternate payee under a "qualified domestic relations order" (QDRO). The QDRO is a judgement, decree, or court order, including an approved property settlement agreement, that is issued under the domestic relations law of a state. A QDRO gives a spouse, former spouse, child, or dependent of a participant in a retirement plan the right to receive as an alternate payee all or part of the benefits that would be payable to the participant under the plan. QDRO's can also be used to enforce an obligation to pay spousal and child support.

Individual retirement accounts

Transferring a taxpayer's IRA to their spouse or former spouse, under a decree of divorce or separate maintenance or a written instrument incident to divorce, is not considered a taxable transfer. Starting from the date of the transfer, the IRA is treated as the spouse's or former spouse's IRA.

Income and estate tax planning considerations

Choosing the correct path for dividing retirement assets can be complicated and tricky. Current and future financial needs and goals must be considered along with the income and estate planning goals of the parties. When choosing between the present and deferred division methods, spouses should consider the following arguments:
 

Present division

• The economic ties between the spouses are severed.

• A spouse can control his or her own retirement assets, using his or her own knowledge and advisors.

Deferred division

• In a defined benefit plan, valuation requires making assumptions that may be materially incorrect.

• Uncertainty as to future vesting of unvested benefits may dictate deferred division.

• There may not be enough other marital assets to offset an award of the retirement plan to the employee spouse and properly balance the property division.

• If rolled over into an IRA, the alternate payee may not want to invest and manage the funds.