How Division of Retirement Assets Occurs
In most divorces, the issue of retirement and how to divide them come up. There are multiple types of retirement accounts and benefits. The easiest to understand is social security. It’s the most simple. A court can not divide social security. It can order a spouse to pay alimony from social security funds. The court also may take it into consideration when doing an unequal division of property in a divorce.
Defined Contribution Plans are retirement plans where an employer or person puts aside a certain amount (pre tax) each month and the employer matches the contribution (pre tax). These can be a 401K, a403(b), IRA, SEP-IRA or a Roth IRA. This is not a pension.
The court can divide any of these types of defined contribution plans. Money earned and put aside pre marriage is taken out of the overall equation. Money earned after separation is not considered generally. Often, lawyers will hire a CPA who specializes in valuation to determine a value of a defined contribution plan where these factors are in play. Values are easiest to determine when all money in a plan was earned while the couple was married.
Another type of retirement plan is a Defined Benefit Plan. These are known as “pensions.” Pensions are a right to get monthly payments, of a defined amount, for the rest of your life starting at a certain age. (That age is often, but not always, 65.)
Pensions are frequent topics of conversation in Boeing divorces, with state employees, military and union workers like SIEU and Teamsters. There are multiple ways these retirement plans are different than defined contribution plans. Perhaps most importantly, you can’t cash them in pre retirement or take a loan against them or transfer them to another.
- What Is Your Retirement Worth?
There is a different way to valuate each kind of retirement plan. For a Defined Contribution Plan, the growth is a compound growth and not simple interest. You must take out any “separate” portion earned pre marriage and then determine the “community” interest.
For valuing a pension it’s a little trickier, as that a pension has no cash value per se. What people generally do is determine a “net present value” calculation. To do this, an assumption is made about the stream of payments you would get for your lifetime, for a number of years. Those values are added together. This calculation discounts each payment by a certain discount factor. This discount tends to be between 4-5 percent per year. Oftentimes, this number can be used in divorce mediation as an item to “trade” value against.
- Dividing Retirement Plans — IRAs and 401(k)s
Dividing retirement plans also depend on what kind of plan you have. With an IRA, a form gets filled out once you have a copy of your finalized divorce decree. When the spouse is awarded part of the IRA, that amount is transferred to them and then they can do with it what they want. If they choose to cash it out, they pay penalties and associated fines. Otherwise, the transfer is a “non taxable event.”
Dividing a 401(K) is much more complicated. It requires what is known as a QDRO (“Qualified Domestic Relations Order”). This order gets drafted and must be approved by a pension administrator. Every QDRO is different as every pension administrator has different rules.
- Dividing Pensions
Dividing Pensions are done using the “Bullicek” formula. This is based on a case from Washington State, In re Marriage of Bullicek, 59 Wn.App 630, 800 P.2d 394 (1990). The formula is: total months of service during marriage monthly benefit ½ x _______ x Total Months of Accredited at Retirement Service at Retirement Date.
Dividing Washington State Retirement Plans vary plan by plan. Between LEOFF I and II, PERS I and PERS 2 as well as municipal retirement plans, there is variance. The State has its own Department retirement orders that have to be signed by the court and approved by the State.
Dividing and understanding retirements is complicated. If you foresee having these issues come up in a divorce, consult an experienced family law attorney. They can help demystify the process and give you an understanding so you can plan for your future.