Your pensions and retirement accounts may be your family’s most valuable asset. Especially if you are a renter or an older adult when your divorce is finalized, you may depend on your retirement accounts to provide for you in your old age, and to establish your legacy. That’s why handling retirement assets and pension in divorce is so important, and often difficult. If you don’t understand what you have, and what your rights are, you may not realize what you have to lose.
The Difference Between Pensions, 401(k)s and IRAs
Before diving into the ways Maryland courts handle retirement assets in divorce, it’s a good idea to define the terms. Many people consider anything they put away for retirement a “pension.” However, retirement assets take many forms, and they can be treated differently by the companies that manage the accounts, and by the courts.
Pensions or Defined Benefit Retirement Accounts
A pension is a traditional retirement plan offered by many government offices and some private employers (especially in trades with unions). A pension is a defined benefit retirement account, because the value of a pension is defined as a benefit of your employment. The pension entitles the plan participant to a certain amount of money each month after they retire for as long as they live. The value of a pension is frequently defined by years of service and salary at retirement. Often there are limits on how early, and how late, the plan participants can start to receive benefits. Frequently, pension benefits are divided “if, as and when”, meaning that you will not receive your marital share of a spouse’s pension until he or she starts to collect.
In addition to a division of the monthly pension benefit, there may be a survivor annuity or benefits that would entitle the participant’s spouse (former spouse) or children to continue to receive benefits even after the plan participant dies.
401(k) and 403(b) or Defined Contribution Retirement Accounts
Most private employers no longer offer pensions. Instead, they may offer “deferred compensation” accounts, often called a 401(k). Some teachers and other government employees also receive deferred compensation benefits in a similar account called a 403(b) account. In these deferred compensation or defined contribution accounts, the employer and employee may each make pre-tax contributions to an investment account, which is then used to buy stocks, bonds, and other investments that grow over time. The retirement benefit directly corresponds to the value of contributions to the account. Once the plan participant reaches retirement age, he or she may (and later must) withdraw the retirement funds on a regular basis to help pay their living expenses and provide a comfortable retirement.
IRAs and SEP Accounts, also Defined Contribution Accounts
A financial planner may also recommend that you open an Individual Retirement Account (IRA). “Traditional” IRAs and Simplified Employee Pension (SEP) IRAs allow employees who do not have a deferred compensation plan at work to gain the same tax benefits from saving for retirement. SEPs are generally used by self-employed individuals or small business owners, while traditional IRAs are available to anyone. There are limits to how much pre-tax money can be contributed to an IRA or SEP IRA each year. If people want to save more than is allowed in these accounts, they may open a separate Roth IRA using post-tax money. The change in value as a Roth IRA’s investments mature is not taxed, so even post-tax Roth IRA accounts make good financial sense.
Annuities
Some people also receive annuities as part of their retirement package, or because of a personal injury or worker’s compensation settlement. An annuity functions like a pension in that it pays a certain amount every month. However, annuities are based on contracts. The amount paid and the duration of the payments depend on the language of the agreement. Like an IRA, an annuity’s growth is not taxed until the person receives the payments from the account.
Does Your Spouse Have a Right to Your Pensions and Retirement Assets in Divorce?
Maryland divorce law gives each spouse a right to an equitable distribution of all property, including pensions and retirement assets, obtained by either party during the marriage. This means that your spouse does have a right to a share of your pension if you earned that pension during the marriage.
How Pensions Benefits Are Divided During Maryland Divorce
Understanding, proving, and dividing pension benefits and retirement accounts in divorce can be challenging. It requires a thorough understanding of Maryland property law, and the federal tax and military laws that affect the distribution of these accounts. Whatever your concerns about handling a pension in divorce, the Law Office of Shelly M. Ingram is able to help you reach a resolution that protects your pension benefits and provides for your family in retirement. We invite you to schedule a consultation to discuss your issues.
However, the Court isn’t required to divide each asset equally. Instead, the Court reaches an equitable property division looking at the family’s assets as a whole. There are a variety of factors the Court will use to decide whether your spouse should get a share of your pension, and how large that share will be:
- Each party’s contributions to the family, both monetary and nonmonetary
- Property values and interests held by each party
- Economic circumstances of the parties at the time of the divorce
- The cause of the parties’ estrangement
- Duration of the marriage
- Age of the parties
- Physical and mental health of the parties
- When retirement assets were acquired and by whom
- Any alimony awards
- Other relevant factors
If, after considering these factors, the Court believes it is fair and equitable to divide the retirement assets one or both parties earned during the marriage, it can award either spouse an interest in the assets held in the other’s name. More often than not, following assessment of relevant facts, the Court will equally divide a pension or other retirement asset acquired during the marriage.
What is a Pension Worth?
Retirement accounts and IRAs are relatively easy to put a value on in a divorce proceeding. Plan administrators generally send quarterly or annual statements disclosing the amount available in the funds, along with their growth or reduction since the last statement was issued. These statements can be used to prove what the retirement accounts are worth.
Proving the value of a pension is harder, and it depends on your life expectancy, anticipated retirement date, and the monthly pension benefit amount you are entitled to. Often, once a pension is partially vested, the plan participant will be entitled to receive a set amount every month for the rest of their lives. The longer they are working participants in the pension plan, the larger this monthly payment grows. If you are still working and growing your pension at the time of your divorce, it will be up to you and your attorney to prove what that pension is worth to you today. Otherwise, your spouse could get access to pension benefits earned long after your marriage is over.
Are There Tax Consequences for Dividing Retirement Assets in Divorce?
Transferring or withdrawing funds from a pre-tax retirement account early generally results in both taxes and early withdrawal penalties. These can add up to a significant percentage of a family’s retirement assets. However, transfers made between spouses as part of a divorce can be done tax-free, as long as they are transferred from one pre-tax account into another pre-tax account in the other spouse’s name.
This can be very important when making your case for distributing marital assets including retirement accounts. If you anticipate using retirement assets to help you get on your feet after a divorce, you may need to budget for a significantly larger withdrawal just to get the money you need to make your payments. However, if you are able to transfer those retirement funds to your spouse while retaining other, post-tax accounts, you will have quicker access to your money, and be able to rebuild your life without paying early withdrawal penalties and taxes to the government to do so.
Can a Maryland Court Divide a Military Pension?
According to federal law, the “disposable retired pay” within a military pension can be treated as part of the marital estate, and divided during divorce. The divisible military pension benefit is “frozen” at the time of divorce, rather than the time of retirement. If a service member gets divorced while still earning his or her military pension, the military spouse will only be entitled to the amount of retired pay the service member would have been entitled to at that time. This is calculated using the retired pay base and years of service as of the date of divorce, even if the service member is promoted or receives a higher pay base later on. Unlike other pensions, there are rules about the length of service and whether or not a former spouse will be able to receive his or her marital share of military retired pay directly from DFAS or whether it will need to be paid directly by the participant’s former spouse.
How to Protect Your Pension During Divorce
Some people place a high value on their pension benefits. They may feel that they earned their retirement through the hard work they did during their career. They may be unwilling to part with that “nest egg” and could prioritize those benefits over other assets accumulated during their marriage. If you believe it is not fair for your spouse to receive a share of your pension benefits, there may be things you can do to protect your pension, and retain most if not all of its benefits.
Separate Property Arguments for Pensions Earned Prior to the Marriage
While spouses are entitled to an equitable distribution of marital property, premarital assets are generally considered “separate property” and awarded to the spouse who brought them into the marriage. This often includes retirement assets, especially in second marriages or relationships that began later in life. If you already had a pension or retirement account at the time of your marriage, it will be up to you to demonstrate the value of that account at the time the marital relationship began. For a 401(k) or IRA, this generally can be done by requesting a copy of the statement issued just before the marriage. In the case of pensions, you may need to demonstrate how long you worked for your employer at the time, and what percentage of your pension benefits were vested before the marriage began. Your plan administrator may be able to help you reconstruct this information.
Protecting Pension Benefits Through Negotiation and Mediation
If you want to protect your pension benefits from your spouse, you may want to try to resolve your property distribution through out-of-court negotiations or mediation. At mediation, you and your attorney can advocate for a distribution of marital property that protects your pension benefits, offering other assets in exchange. However, before entering into these negotiations, you will need to understand the full value of your pension, and the costs associated with dividing it. Knowing how things like survivor benefits may affect the monthly payments will make it easier for you to demonstrate that a pension transfer is too inconvenient or won’t benefit your spouse as much as the alternative assets you propose. If you are unable to reach a settlement, the Court will likely divide the asset.
Special Orders Handling a Pension in a Divorce
If your settlement agreement or the Court’s order after trial awards one spouse pension benefits or retirement assets from an account in the other spouse’s name, then you will probably have to enter a separate order directing the plan administrator to divide the assets. This order is called a Qualified Domestic Relations Order (QDRO) for private pensions or Eligible Domestic Relations Order (EDRO) for government pensions. It describes which benefits or retirement assets are awarded to the “plan participant” – the one in whose name the benefits are held – and which should be transferred to the “alternative payee’ – the divorcing spouse.
QDROs and EDROs are highly specific orders that require careful attention to the different rights and pension benefits pensioners have under their accounts. You and your attorney should consider the impact of early retirement, delayed retirement, death of the plan participant, and loans against the principal retirement assets could affect the way the QDRO is written and carried out. This order is worth going through all the details – even the ones that are hard to understand. Errors in entering a QDRO can add up to tens or even hundreds of thousands of dollars in benefits being sent to the wrong spouse, or even lost entirely.
Get Help Protecting Your Retirement in Your Divorce
Understanding, proving, and dividing pension benefits and retirement accounts in divorce can be challenging. It requires a thorough understanding of Maryland property law, and the federal tax and military laws that affect the distribution of these accounts. Whatever your concerns about handling pensions in divorce, the Law Office of Shelly M. Ingram is able to help you reach a resolution that protects your pension benefits and provides for your family in retirement. Call us at (240) 652-2596
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