Division of Retirement Accounts a Growing Concern in Divorce

 Posted on May 30, 2018 in Divorce

Most Americans can expect to live for about 15 to 20 years after their retirement. But are we saving enough to live comfortably in retirement? Among families with income in the 50th percentile and above, over 80 percent at least have some type of retirement account, such as an IRA, 401(k), or defined-benefit pension plan. That is a good start, but most are not saving enough.

A recent survey found that just 40 percent of those aged 35-54 and just 50 percent of those age 55+ have over $100,000 in retirement savings. By most accounts, this is not nearly enough, even considering the addition of Social Security payments. According to a recent Harvard Business Review article, a median income worker can only expect their Social Security payments (after Medicare premiums) to equal 29 percent of pre-retirement income.

Hence, it is important to highlight the need to make sure retirement accounts are equitably divided in a divorce. It is all too easy to focus on pressing issues like child support and what happens to your house, and possibly miss out on what is due to you from a spouse’s employer-held 401(k) or pension plan.

What Retirement Assets Qualify as Marital Property for Division

Any retirement savings or pension benefits accumulated prior to a marriage, and any earnings or growth in value on the pre-marital savings, would not be considered marital property under the law.

However, any contributions added, and any growth in value, during the marriage would be considered marital property and would be subject to the “equitable division of property” law.

How State Pension Benefits Are Split in a Michigan Divorce

If one spouse is currently employed and covered by the public retirement system for Michigan state employees, public school employees, judges, or police, then an Eligible Domestic Relations Order must be filed with the retirement system. The EDRO specifies how pension payments should be divided at the time of retirement. The divorce settlement should note the agreed-upon terms, but the EDRO must be filed as well.

If a spouse is already retired and receiving a pension from the state, then a Domestic Relations Order must be filed.

How 401(k) Funds Are Split in a Michigan Divorce

Because 401(k) funds are run through a spouse’s employer and governed by federal law, any division of such funds requires a Qualified Domestic Relations Order. The QDRO must meet specific federal requirements as well as any requirements set by the Plan Administrator.

There are a number of ways such funds may be divided:

• Keep a 401(k) intact and grant the other spouse other marital assets of equivalent value;
• Split the funds at the time of the divorce, transferring the other spouse’s share into a separate IRA;
• Keep the account intact until retirement age and specify how distributions should be divided at that time; or
• Liquidate the entire account, paying any necessary penalties and taxes, and divide the remaining funds along with the rest of the marital property. This might be appropriate if the couple needs cash to pay off debts as part of the divorce.

How IRAs Funds Are Split in a Michigan Divorce

Because IRAs are owned and managed by the individual, typically through a bank, stockbroker, mutual fund company, or other financial services provider. A DRO is not required to split these funds. The individual can simply order his or her financial advisor to transfer a portion of the money in his or her current IRA to a new account in the name of his or her (soon to be ex) spouse. As with other assets, the exact split would be spelled out in the divorce settlement.

Consult an Experienced Southeast Michigan Divorce Attorney

The legal and financial issues surrounding the division of retirement accounts and pension benefits can get very complicated. Consult an experienced Farmington Hills divorce lawyer for guidance. Call Elkouri Heath, PLC at 248-344-9700 to schedule a meeting at our Novi, Michigan office with a divorce lawyer knowledgeable about property division issues.

Sources:

https://www.cbsnews.com/news/us-retirees-life-expectancy/

https://www.cnbc.com/2018/03/19/most-americans-close-to-retirement-have-saved-12-percent-of-what-they-need.html

https://www.gobankingrates.com/retirement/planning/why-americans-will-retire-broke/

https://hbr.org/2018/03/americans-havent-saved-enough-for-retirement-what-are-we-going-to-do-about-it

https://www.michigan.gov/documents/r259x_15866_7.pdf