How Divorce Can Affect Retirement Benefits

By Linda D. Schoonover, Esq.

Times really have changed. Years ago, men worried about their wives taking their retirement in a divorce situation. Today, just as many women are worried that they, too, will have to give up what they earned. When both spouses work and have earned retirement benefits, they most often have to share them in a divorce situation.

The following example may help you understand how retirement benefits are shared in the Florida court system.

Morgan is 35- years-old, has been employed with a pharmaceutical company for 10 years and has been married for five years. She began investing in a 401(k) with her company eight years ago. At the time of her marriage, she had $10,000 in her 401(k) account.

Since then she has invested another $10,000, leaving her with $20,000 in that account. Her husband, who has been self-employed, has not accumulated any retirement benefits. He has served her with a petition for dissolution. Is he entitled to one half of her 401(k)?

Typically, savings accumulated during a marriage are a marital asset and are subject to an equal division (or what the courts refer to as “equitable distribution”). In this case, monies invested by Morgan prior to her marriage would not be subject to equitable distribution. Therefore, only $10,000 would be subject to equitable distribution and $5,000 would be the husband’s interest in Morgan’s 401(k) account (not including variations for interest, withdrawals, etc). If the only marital asset subject to equitable distribution was this retirement asset, Morgan would need to transfer $5,000 to the husband.

However, it would not be necessary for Morgan to actually withdraw her share of monies in the 401(k) if the parties had another marital asset of equal value (approximately $10,000) that could remain intact. For example, if the parties had a money market account worth $10,000; the wife’s share of that would be $5,000 (the same value as the husband’s share in the wife’s 401(k). It would be simpler and less costly for the parties to leave the 401(k) account intact and to distribute the money market asset in its entirety to the husband.

When possible, it is best for the spouse with the retirement account to retain such account in its entirety and distribute another asset of equal value in order to avoid unnecessary legal fees and further involvement of the court or counsel.

If a portion of a retirement account must be distributed, the money should be transferred into a tax-deferred account of the receiving spouse pursuant to a Qualified Domestic Relations Order (QDRO) to avoid unwanted tax consequences.

Depending on the complexity of the retirement vehicle, it is sometimes advisable for both parties to retain separate counsel to prepare the QDRO. This usually requires payment of extra attorneys’ fees in addition to those typically charged by the legal counsel for the divorce. Some parties may retain attorneys who specialize in retirement benefits. QDROs must be approved by the retirement plan’s administrator prior to their approval by the court. The Final Judgment of Dissolution should specifically retain jurisdiction for the court to approve a QDRO in order to distribute the retirement funds.

For more information about your needs, call for a consultation or sign up for a Lunch and Learn program at the Law Office of Linda Schoonover, at 407-771-2000.