Property Division Frequently Asked Questions: Retirement Accounts
- How will my pension be divided in my divorce case?
Pensions, more properly termed “defined benefit plans,” are retirement plans which pay out a monthly amount to the recipient at a specific age, as determined by the plan. Unlike a 401K or an IRA, pensions do not necessarily have a cognizable, lump sum value. Without a lump sum value, the division of a pension requires more analysis and work that just indicating, “the plan is worth $100,000; you get half or $50,000.”
The general method for dividing a pension in a Colorado divorce is the “time rule formula.” The time rule formula entails a calculation setting forth the following: years of service over years of marriage, times the marital fraction, times the amount to be received at the time the monthly pension proceeds are paid out.
With most pensions, the plan participant, or pension owner, cannot just access the pension funds for purposes of immediate division. As such, the time rule formula recognizes that funds may not be paid out for some time. The formula also recognizes that the years of marriage in which the pension is paid into may be less than the overall years of accrual.
For example, regarding facet one of the time rule formula, if a woman works for a company for 30 years, but is only married for 15 of that, the first portion of the formula would be 15 over 30, or 1/2. In most Denver area divorce cases, the marital fraction, meaning the portion of the marital portion of the plan to be received by the other spouse, will generally be .5 or one half.
The general rule of thumb for marital property division is that courts divide property equally. In recognition of the fact that pensions may not be paid out for many years, the time rule formula looks to what is being paid out at the time of retirement, a figure that is not necessarily going to be known at the time of divorce. Using the figures above, and assuming a hypothetical retirement date payout of $1,000 per month, the formula would be 1/2 x 1/2 x $1000, or $250 per month to be paid out to the spouse.
With the formula, the fact that the other spouse gets a portion based on dollars at the time of retirement is balanced out or accounted for, from a fairness standpoint, by the fact that the first fraction goes down with continued, or premarital, years of service. Thus, there is an actual segregation of the non-marital portion of the pension. The actual formula will be put into a document called a Qualified Domestic Relations Order, which directs how to specifically divide the plan at the time of retirement.
- My husband and I have agreed to split my 401K equally. Will I be taxed for this?
401Ks and other retirement accounts are often divided as part of the divorce process. Generally, transfers of property incident to a divorce are not deemed to be a taxable event by the Internal Revenue Service. Retirement accounts, such as 401Ks and pensions are generally divided via what are called, Qualified Domestic Relations Orders (QDRO's to us attorneys). A QDRO is a specific order setting forth the terms of division of an account and will be signed off on by the divorce court judge prior to submission to the plan administrator. Providing the other spouse his or her share of the 401K through a QDRO will not give rise to tax, or penalty, consequences.
If one just pulls the funds owed out of the 401K without going through proper procedures, there will be potential tax or penalty consequences. When dealing with IRAs, funds can be rolled over from one account to another without tax or penalty. Again, just withdrawing the funds and paying them to the other spouse is another story. The experienced divorce attorneys at Plog & Stein can help with your Colorado property division concerns, including those related to retirement accounts.
- My wife filed for divorce, can I drain my 401K to keep her from getting it?
It is common for people facing a divorce in Denver to want to protect their property. However, once you file for divorce or are served with divorce papers, there is an automatic injunction in place, pursuant to C.R.S. 14-10-107, which prohibits the hiding, concealing, encumbering, or depleting of marital assets while the divorce is pending, except in the normal course of business or for the necessities of life. Thus, if you have been served with divorce papers, you cannot just go drain a 401K or similar account. The other side will find out through the financial disclosure process and one can find himself or herself in trouble with the court.
If the funds are drained or squandered, the court will likely still make that party responsible for paying the other party his or her share of the funds. Thus, draining the account makes no sense. Additionally, even if the 401K was drained prior to the divorce being filed, if it was done unilaterally and without consent of the other party, the court may still award the other party his or her share of the funds under a theory of marital waste or asset dissipation. Hiding assets or disposing of them to avoid property division in a divorce will generally backfire. Attorneys know how to chase the money and there is almost always a paper trail.
- Does my wife get part of my Social Security when we divorce?
The answer to this question is both yes and no. Social Security benefits, though similar to retirement benefits, are not considered property, but rather income. That being said, in situations where the parties to a Colorado divorce have been married for 10 years or more, a divorced spouse may elect to draw Social Security benefits based on the payment received by their former spouse, which can be half of the payment received by that former spouse.
For example, if the wife receives $2,000 per month in Social Security benefits, the former husband can elect to receive $1,000 per month. This will generally be done when that $1,000 is more than what the husband would receive in Social Security based on his own earning history. Fortunately, when one spouse elects to draw Social Security based on their former spouse’s monthly benefit amount, the proceeds received by that spouse in no way affect the second spouse. Though Social Security benefits are not property, looking at what those benefits may be can be important to both assessments of how to divide retirement property, as well as might relate to alimony.