Following a divorce your retirement plan will be impacted, but being knowledgeable about possible impacts and choices for handling your retirement plan will significantly reduce the possibility of negative impacts to your accounts. In general these accounts are designed to offer the proprietor financial security for post working life, accumulations of wealth, and certain tax benefits. In the state of Georgia these benefits are subjected to equitable division after a couple has been married for more than 10 years. Equitable division does not equate with equal division and in some cases the ex-spouse may receive more than 50% of the marital retirement plan. Further, if the plan is subject for division then the extractions from the account may impose penalties if withdrawn before the intended use of retirement. Understanding which type of account is held and being knowledgeable about particular division option plans may better prepare you in the most cost effective ways of extracting funds from the plan in the event of a divorce.
Divorce and Your Defined Contribution Plan:
A Defined Contribution Plan includes all employer sponsored plans and individual account contributions that invest funds, Individual Retirement Accounts (IRA’s), 401k, 403(b), and profit sharing plans. Generally these types of accounts are non-taxable at the time of contribution and are not permitted to be withdrawn from without penalty until after the age of 59.5. These types of accounts are also closely monitored by the IRS which places limitations on the maximum amount of investment contributions annually. Withdrawing from these types of accounts is penalized by a 10% early withdrawal penalty and the amount of monetary funds extracted from the account is taxable as annual income. The maximum allowance of annual contributions capped by the IRS in 2014 was $5,500 dollars.
Divorce and Your Defined Benefit Plan:
Defined Benefit Plans include all types of pension plans. In general a payout of a pension plan is determined by calculations of fixed formulas for establishing lifetime payments. A Defined Benefit Plan payout is calculated using the final pay salary and the number of years of service; the payout is therefore dependent on the amount of money contributed and the amount of work investment. The types of payouts may also be provided through single life annuities or through survivor annuities. Single life annuities almost always generate higher monthly payments to the proprietor whereas joint/ survivor annuities provide for lower monthly payments- over larger spans of time. Early withdrawals from Defined Benefit Plans holds similar consequences as previously mentioned plans.
Divorce and Hybrid Plans:
Hybrid Retirement Plans may involve more unique and complex contribution arrangements, but customarily include a combination of both Defined Benefit Plan and Defined Contribution Plan features. A- typically a Hybrid Plan’s design will permit a cash balance plan that permits the proprietors value account balance to advance by a definite rate of interest in addition to the annual employer contribution. Again dividing the account prior to the age of retirement, age 59.5, will significantly impact the collective amount of the account through taxation as well as in account penalties.
How are Retirement Plans Divided in a Divorce?
During a divorce the first step in dividing a retirement plan is to determine the value of the accounts at hand. A retirement plan may be both a marital and non-marital asset and under family law the amount of marital value is to be equitably divided between the parties at the time of divorce. Therefore contributions to accounts prior to the marriage must be calculated and subtracted from the overall amount of the account. When it is possible the last monthly statement prior to the marriage as well as all of the end year statements for the account can exactly determine the amount of value of the account during the course of the marriage. However, in some cases parties may not have access to such information in which a formula may be used to determine the amount of non- marital property in the account. The formula for calculating the account is as follows: Average Yearly Contribution (x) Number of Years Worked Prior to the Marriage, Total Value of Plan (-) Non-marital Worth of Plan. Estimates using the formula may inflate the value of the non-marital contributions due to the average generally increasing over time. Additional benefits that exist outside of the obvious value may also be valued; such as the cost of living adjustments, surviving spouse benefits, and early retirement buyouts.
In Georgia all marital property continues to accrue during the divorce process and only ends once a final judgment/ decree is entered completing the divorce. An important thing to remember is that during the divorce the marital property still includes any growth of the retirement plans prior to the divorce being finalized. During a divorce proceeding a spouse may choose to either temporarily cease their retirement contributions or may decide to continue contributing contributions. Choosing to temporarily cease contributions may result in additional taxes, but generally doesn’t cause any other punitive measures. On the other hand, continuing contributions can lead to a greater amount of funds that will be required for division and in the state of Georgia an equitable division of the asset can mean that the other spouse can receive more than 50%.
In order to divide some types of accounts your attorney may need to file for a Qualified Domestic Relations Order or QDRO. A QDRO will allow for the plan administrators to divide the account by federal guidelines and according to the settlement agreement on how the plan will be transferred, and split into accounts as defined in the court order. In addition a QDRO will permit for the portion that is needed to be transferred out of the retirement plan to be withdrawn without penalty and transferable into a new separate account. Divisions of a traditional IRA or a Roth IRA do not require the use of a Qualified Domestic Relations Order (QDRO) – as these types of accounts can generally be equitably divided without interference in Federal laws. A QDRO will allow for a single withdrawal from the plan without the typical 10% early extraction penalty; however, the funds will still be subjected to taxation as it counts as annual income.
Alternative means of extracting money can also take place in the form of borrowing from an account for smaller payments, but generally restrictions apply and repayment plans are fixed. Extracting money from an account for a type of loan limits the amount of money withdrawn from the account to under $50,000 dollars and the moneys must, “be repaid in no less than equal quarterly payments over five years (15 years if borrowed to purchase a home or second home) with a reasonable interest rate being paid.” Another way to avoid a 10% penalty charge is to withdrawal large portions of money to fund higher education cost for children or grandchildren. Withdrawals for the purpose of higher education cost do not incur penalty charges even if the withdrawals occur premature to the plans retirement age.
After a Divorce:
The changes and transfers of monetary funds will take place following the final decree in the divorce proceeding. Following the court proceeding and a judgment is obtained then the proprietor will be required to request a change of beneficiaries. The change of beneficiary notice is mandatory under federal law and will protect the retirement plan from unnecessary withdrawals and ex-spouse access outside of the arrangements implemented by the court. It is important to remember that the divorce does not immediately resolve the division of this type of property and an attorney investment may still be necessary to obtain a division through the use of court order, Qualified Domestic Relations Order (QDRO), and or other means. Lastly, failures to be knowledgeable about the plan and implement the division correctly can have significant legal and financial impacts on the monetary security of the retirement plans in question.