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How to Split a Retirement Plan During Your Divorce: The Collaborative Divorce Way

Divorce can impact every aspect of your life, but one aspect couples might not consider is that divorce can impact your retirement planning. Even if you are still years away from retirement, your retirement plans and pension plans can make up a significant part of your shared marital assets. Aside from your family home, your retirement or pension plan might be the most significant asset you share with your former spouse. The collaborative divorce lawyers in Seattle, Washington at Truce Law understand that when it comes to retirement planning and financial planning, it makes sense to call in the experts.

Rather than spending money and billable hours preparing for a court battle, couples who choose the collaborative divorce process in Seattle, Washington can invest in hiring a team of professionals to join them at the negotiating table to work out a division of assets that is fair. If a retirement account or pension plan is a significant marital asset, your collaborative divorce team might include your collaborative divorce lawyer, your former spouse’s collaborative divorce lawyer, a retirement planner, actuary, or accountant, to help you understand the value of your marital estate, and help you split it fairly and properly. This can be a complicated process. The collaborative divorce lawyers in Seattle, Washington at Truce Law can help you build a divorce team that can help you address the major challenges that can arise.

Your divorce lawyer isn’t an accountant, actuary, or retirement planner nor are judges retirement planners, actuaries, or accountants. Division of retirement accounts and pension plans is where common mistakes are made, and where valuation and division can go wrong. Divorcing couples might intend to split these assets 50-50, but because of the way these assets are taxed, and because of the way these assets appreciate or are distributed, they may still get the division wrong if they don’t hire experts.  Couples who choose the collaborative divorce process can invest in hiring a team of professionals to help them navigate the complex challenges that can arise when splitting assets and debts.

Here are some of the basics about splitting retirement accounts.

Value added to a pension plan during a marriage is considered a shared marital asset, as is any value added to retirement account (unless you’ve previously established that these assets will remain separate in a prenuptial agreement). If your spouse works, and has a pension plan, you would be entitled to receive payments and benefits from this plan earned during your marriage. And if you work and have a pension plan, your spouse would be entitled to receive benefits and payments from value added to your pension plan during your marriage.

Retirement accounts and pension plans have unique tax implications during divorce, and there are strict laws about how money can be withdrawn or transferred from these plans without a penalty. When dividing assets during your marriage, it is important to consider the tax implications of the assets you are dividing because this can affect their value. For example, if you sell the family home, your takeaway profit from the sale is calculated after you pay your real estate agent, closing costs, and taxes. Similarly, with a traditional retirement account, contributions are made before taxes, and the income from the account will be taxed when you retire, while with a Roth account, contributions are made after taxes, so you can withdraw money tax-free. A Roth account is therefore worth more than a traditional retirement account, and this needs to be considered when estimating the value of marital property and when dividing marital assets.

To avoid penalties, specific forms must be used, and a divorce decree will need to be submitted when withdrawing money from a retirement account to transfer to your partner in the divorce, or when specifying how much money from a pension plan should be paid to your former spouse. Your Seattle, Washington collaborative divorce lawyers at Truce Law can help you navigate these unique challenges.

Types of Retirement and Pension Accounts

If your former partner has the pension plan, manages the retirement accounts, or does all the financial planning, this can put you at a disadvantage because you may not know the full value of the assets you share with your former spouse. At the start of the collaborative divorce process both parties sign a collaborative divorce agreement in which they agree to act in good faith, which includes disclosing information about all assets, including retirement accounts. In other words, both parties agree to bring all their cards to the table and to reveal them.

But if you don’t know what you’re looking at, it can be difficult to know what assets you’d be entitled to receive. Finally, retirement planning can be complicated, and even a partner who manages the finances, has the pension plan, or puts money in the retirement accounts may not fully understand his or her obligations when it comes to splitting the retirement account during a divorce. This is why it is essential to have a strong Seattle, Washington collaborative divorce lawyer and team on your side. The collaborative divorce lawyers in Seattle, Washington at Truce Law can review your finances, help you bring experts to the table, and assist you in making the best possible decisions for your future.

The IRS provides a comprehensive list of the types of retirement accounts and pension plans available. Let’s take a brief look at these plans and explore their differences and similarities.

  • Individual Retirement Arrangements (IRAs): An IRA is a savings account designed for long-term savings. You can put money into an IRA before taxes, and the money in your IRA can grow tax-free. Taxes are paid when you withdraw money from an IRA after you retire. If you withdraw money from an IRA before you turn 59 and a half, you could face a hefty 10% tax penalty.
  • Roth IRAs: Roth IRAs work like IRAs, but you pay taxes on the money before you put it into the account. The benefit of this account is that you can withdraw money from the account tax-free when you retire.
  • 401(k): With a 401(k) your employer will put a percentage of your paycheck into a savings account, which can be an IRA or Roth IRA. Sometimes an employer will match your contribution, increasing the amount that goes into the 401(k) each paycheck. Yet, with a 401(k), you may need to work a certain number of years at a company to keep the matching funds. If you leave the company sooner, you may not be able to keep the matching amount.
  • Simple 401(k): If you work for a small business (a business with fewer than 100 employees), are self-employed, or are in a partnership, you might have a Simple 401(k). With a simple 401(k), your employer makes a smaller percentage in matching contributions, but you don’t need to work for your employer for any specified time to have access to the matching contributions. From day one the matching contributions are yours. If you are getting divorced, it can be helpful to determine whether you have a Simple 401(k) or just a 401(k) because the value of funds in one may be contingent on continued employment. So, if your spouse gives you his or her 401(k) in your divorce, but then leaves his or her job, you might find yourself with less money than you thought. If you have a simple 401(k), the value in the account is yours whether or not your spouse continues his or her employment.
  • 403(b): A 403(b) plan is similar to a 401(k) plan but is available to employees of public schools, churches, or charitable organizations.
  • Simple IRA Plans: If your employer has a simple 401(k), your employer can elect to put your money in a Simple IRA. You have access to all the money in the Simple IRA Plan from day one.
  • Simplified Employee Pension (SEP): With a Simplified Employee Pension, only your employer will contribute to the IRA. Some years your employer might contribute more and some years less. With an SEP, you have access to all the money in the SEP from day one.
  • SARSEP (Salary Reduction Simplified Employee Pension): These are older plans like SEPs. If your employer established one before 1996, your employer may still be managing this plan for you. With a SARSEP, your employer can deduct money from your salary to contribute to the plan. Laws have changed and these plans can no longer be started.
  • Payroll Deduction IRAs: With a payroll deduction IRA, your employer doesn’t make a matching contribution but offers you the opportunity to deduct money from your income to your IRA account. These IRAs work just like traditional IRAs and Roth IRAs.
  • Profit-Sharing Plans: With a profit-sharing plan, only your employer will contribute to the IRA or Roth IRA, and the amount of money contributed each year can vary.
  • Defined Benefit Plans: Defined benefit plans are retirement plans provided by employers which guarantee a fixed benefit amount to an employee at retirement. With these plans the employer generally makes all the contributions and manages the plan.
  • Money Purchase Plans: With these retirement plans, your employer agrees to set aside a certain percentage of your salary each year.
  • Employee Stock Ownership Plans: With an Employee Stock Ownership Plan, you receive a percentage of ownership in the company instead of a 401(k). If the company stock does well, you do well, too. Yet, these plans can be difficult to split during a divorce because stock values can rise and fall. A financial planner, actuary, or accountant may need to determine the value gained during the marriage, put a specific value on this amount, and then the divorcing couple will need to find a way to ensure that the spouse who doesn’t own the stock receives this value through division of other assets, division of other accounts, or the sale of stock, if possible.
  • Governmental Plans: Governmental plans are pension plans for government workers or military personnel. Military divorce can be complicated because there are laws governing when a spouse can receive benefits in a divorce, and also state laws governing how military benefits can or should be divided.
  • 457 Plans: These are like governmental plans, but available state and local governments and governmental entities.
  • Multiple Employer Plans: Sometimes small businesses or companies will pool their resources to create retirement plans for their employees.

This is just a general informational overview of the type of retirement plans out there and isn’t meant to replace advice of a financial planner, actuary, or accountant. As you can see, the long-term value of a retirement plan can depend on many different factors. The value of a given retirement plan might depend upon a spouse’s ongoing employment, stock performance of a given company, and whether you have an IRA or Roth IRA account.

Divorce can change your retirement plans because you and your former spouse may need to figure out how to transform a shared dream into one that works for your new single lives. With the help of the collaborative divorce lawyers in Seattle, Washington at Truce Law and your collaborative divorce team, you can protect your retirement assets and work together to ensure that the hard work you and your former partner did together to save for the future can fund your new individual retirement dreams.

Dividing Retirement Accounts During Your Divorce

There is no one right way to divide the value of a retirement account in a divorce. The first step in dividing a retirement account is determining the value gained by the account during your marriage. This is important if you contributed to the retirement account or pension plan before you were married. Some retirement accounts will be easier to appraise than others.

For example, with a Roth IRA, your accountant can look at the contributions made during the marriage, look at the amount of money the account earned in interest, and clearly put a value on the account, because with a Roth IRA, taxes have already been paid. The process for determining the value of an IRA will be similar, but tax considerations must be included in the appraisal. In general, when you retire, you’ll be in a lower tax bracket than you are right now, but calculating these values is best left up to an accountant, actuary, or retirement planner who can properly estimate the value of your IRA and how taxes might impact its value.

If you have a pension, defined benefit plan, or stock options as part of your employer-provided retirement plan, dividing assets during your divorce may be more complicated. According to the National Law Review, the value of benefits can be divided when you get divorced or when your retire and receive the benefits. Your spouse is only entitled to receive a portion of the benefits for the years you were married and worked for the company. An accountant or actuary would need to calculate first the value of the benefits earned during your marriage, and then account for the expected value of your benefits when you retire and assign a percentage to your former spouse (usually 50% of the value of the benefits earned during your marriage). Or you could take this appraised value and offer it through division of other assets like equity in the family home or through other cash savings or investments you might have. According to National Law Review, divorcing couples will need to consider survival benefits and how they might impact the value of a retirement account or division of assets in their divorce.

If you own stocks as part of your retirement plan, your accountant, actuary, or financial advisor would similarly need to assess the value gained during your marriage, and then determine a way to ensure that assets are split in a way that the value is transferred. Sometimes stocks can be sold to your spouse, and sometimes they cannot be sold.

To split a retirement plan or assign benefits to a spouse after divorce, you’ll need a Qualified Domestic Relations Order. This order helps protect you from facing tax penalties for early withdrawal of funds from you IRA or plan and helps offer directions about how the administrator of your retirement plan should pay your former spouse when distribution time comes.

Dividing retirement accounts can be complicated, but with the help of a strong collaborative divorce lawyer and team in Seattle, Washington, it can be done peacefully. Truce Law is a collaborative divorce law firm in Seattle, Washington that works together with divorcing couples to help them divide their assets at the negotiating table with experts rather than in the courtroom.

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