So what happens to retirement plans during a divorce? How are they valued? How can I get my share of my spouse’s retirement? When can I start receiving my share? Can I keep my own retirement and my spouse keeps their own retirement?
These are all great questions that I am asked by people going through divorce.
Let me first start out by saying that generally there are two types of retirement. The first is your traditional 401(k), and the second is a pension plan. Some people have one or the other while some people have both.
The law says that at the time of a divorce, the nonparticipant spouse (i.e. the spouse who doesn’t have the retirement in question) is entitled to 50% of the contributions and increases in their spouse’s retirement since the date of marriage. This means that you get half of what your spouse contributed to the retirement and the increase in it since you were married. You didn’t have to participate in the retirement directly or do anything other than be married to your spouse.
How these are divided and when you receive it depends on the type of retirement in question. A 401(k) plan and a pension are very different. A 401(k) is a lump sum of money that is usually readily available while a pension plan is a pay out at the time that your spouse is eligible to retire. For the 401(k), if there is $500,000 in your spouse’s retirement plan, the court will divide it immediately and allow you to roll over half of this into your own 401(k). There is no waiting. A pension plan is a monthly payment and that gets a little more complicated, but essentially you would get 1/2 of the monthly payment when your spouse is scheduled to retire. There are a lot of rules and regulations that go along with retirement and you will need a good attorney to help steer you through this process.
Sometimes, both spouses have retirements. In this case, we divide each retirement in half or if the values are similar in the retirements, we end up with each spouse keeping their own retirement.
Finally, I want to touch on 401(k) plans versus pension plans. 401(k) plans are like bank accounts. You can look at them and see what they are worth immediately. Pension plans are not the same. We use special accountants called actuaries to value pension plans. They take the monthly payment that your spouse will receive in the future and using a mathematical formula, they come up with a fixed dollar amount. This is
done when one spouse is going to keep one of the marital assets in full (like the house) and the other spouse wants to keep the pension plan.
The bottom line is that, often, retirement plans are the most valuable assets in a divorce. It’s very important to know what you have, what your spouse has, and what you are entitled. Mistakes in diving retirements can cost you thousands of dollars and expose you to potential tax liability.