Dividing Retirement Benefits in a Divorce
Friday, April 16, 2021
One of the most often asked questions about equitable distribution of marital assets is how a retirement asset is divided between spouses. The answer depends largely on the type of retirement account being divided and what rules are associated with the retirement account.
All retirement accounts are not alike. The first question that must be asked is what type of retirement account are you dealing with? Generally, retirement plans are one of two types: a defined contribution plan or a defined benefit plan.
A defined contribution plan is a retirement plan in which the employee, or in the case of an IRA, the individual, contributes a set amount. An employer may match contributions up to a certain amount. The most well-known type of a defined contribution plan is a 401(k) plan. The employee typically has a portion of his or her paycheck deducted, which goes into the account. Many times, an employer will match a percentage of the deduction up to a cap. The deductions are pre-tax, meaning that the money comes out of the employee’s gross pay before taxes are withheld. The money is then taxed when the employee retires. The assumption is that the employee will be at a lower tax bracket at the time of retirement. The individual always knows how much is in the account and what the retirement is worth. For example, if after five years of employment the employee has contributed $30,000 and the employer has contributed $10,000, and the account has earned $400 in interest, the account value is $40,400.