Divorce And Retirement Assets
Many people now start saving early and are able to create a substantial retirement asset pool that helps them remain financially secure and lead a good lifestyle in their later years. Retirement accounts are often one of the major assets for married couples as they grow older.
Therefore, in the event of a divorce, both parties should give special attention to how their retirement assets are divided. A seasoned family law attorney in Orange County can help ensure that your retirement fund division is performed fairly during divorce so that you can continue to lead a secure life moving forward.
Retirement Benefits that may be Divided in Divorce
California is a community property state, which means that all marital property will be divided equally between the two divorcing spouses. Pensions and other retirement benefits, whether accrued or vested during the course of marriage, may be treated as community property. Examples of retirement benefits that may have a community property component at the time of divorce in California include:
- 401(k) and 403 plans
- Defined benefit plans
- Defined contribution plans
- Military pensions
- ERISA funds
- Veteran’s educational benefits
- Employee Stock Option Plans (ESOPs)
Notably, social security payments are not considered as community property in California. Some other retirement benefits, such as workers’ compensation disability payments and military injury compensation are also not treated as community assets.
Your best bet would be to negotiate with your ex-spouse for the settlement of your retirement accounts division through an experienced Orange County divorce lawyer. If an agreement is not possible, the court will divide the retirement assets using its own judgment.
Dividing Retirement Assets through QDRO
QDRO or a Qualified Domestic Relations Order is a special court order, which will be needed for the division of pensions and some other types of retirement funds. This order is required irrespective of whether both parties arrive at a settlement through negotiation or through court trial. The need for this order arises because pensions involve a third party administrator.
Your pension plan administrator is obligated to distribute your payments according to the terms laid out in your plan. The administrator can only direct these payments to an ex-spouse after a QDRO has been obtained. In some retirement plans, you may need to “join” the plan as a divorcing spouse in order to obtain a QDRO.
You may need guidance from a knowledgeable Orange County divorce lawyer to complete this complex process. Examples of specific retirement plans that require this process are:
Federal government plans
- Federal Employees Retirement System (FERS)
- Civil Service Retirement System (CSRS)
- Foreign Service Pension System (FSPS)
State government plans
- California State Teachers’ Retirement System (CalSTRS)
- California Public Employees Retirement System (CalPERS)
- University of California Retirement System (UCRS)
Retirement plans that come under ERISA, such as ESOPs, private company pensions, severance plans, and profit sharing plans do not require you to through the joining process to obtain a QDRO. IRAs (individual retirement accounts) and Roth IRAs usually do not require a QDRO for dividing the assets for divorce.
Additional Ways to Divide Retirement Funds
QDRO calculation is not necessary for some of the retirement funds in a California divorce. For instance, you and your ex-spouse can follow the “buy out” guidelines of a defined contribution plan to divide the asset. By choosing this method, you and the other party can simply compute the present value (PV) of the plan and the spouse without the plan can cash out in full.
Your divorce lawyer may help you obtain advice from a pension actuary to determine the plan’s present value. Another option to split certain retirement funds is by providing the spouse without the plan a certain percentage the employee spouse’s monthly pension payments.
To calculate this percentage, you can divide the number of years your marriage lasted with the total number of years the employee spouse was a part of the pension plan. At the time of retirement, each party will receive their share of the payment.
Time-Rule Formula to Divide Retirement Assets
Retirement funds in California are now often divided using the time-rule formula in the event of divorce. This formula allows the parties to characterize community and separate retirement assets. The time-rule formula is essentially a ratio of the time worked during the marriage to the total time during which the plan holder participated in the plan.
Defined benefit plans such as pensions are usually divided using the time-rule method because the retirement benefits in this case are correlated to the number of years in employment. But you may also use the time-rule formula to divide stock options or other assets. Where the retirement benefits are dependent on other factors (and not the number of years in service) you may have to use a different formula.
Example of time-rule formula
Let’s say you were married for five years, while you worked with your employer for 15 years and accrued retirement benefits throughout this period of service. In this case, the community property component of your retirement funds will be calculated as 5/15 or 33%. The remainder 67% would be treated as your separate property at the time of property division in a divorce.
Avoiding the Division of Retirement Assets
In some cases, the divorcing spouses may decide to adopt a simple solution for property division, which entirely avoids the division of retirement assets. For example, if your community property home is worth about $500,000 and your retirement accounts are worth nearly the same, you could agree to keep the retirement accounts while the other party keeps the house.
This will avoid the need to sell off the home and divide the proceeds, while splitting the retirement assets by going through the complex QDRO and other requirements. A desperate home sale may not get you the best market value, and dividing retirement accounts would add further delays to the finalizing of your divorce.
But before you consider these options, you need to look at your financial position and your personal long-term goals. If the house is sold, you get immediate cash in hand, where as retirement funds cannot be accessed immediately unless you are willing pay penalties and taxes. Your divorce lawyer can connect you with a trusted financial planner for best advice.
Speak to an Accomplished Orange County Divorce Lawyer
The division of retirement accounts in an Orange County divorce is never easy. Unless you have the best legal advice available, you could make key financial mistakes that you may regret later for years to come.
Discuss your property division issues with an accomplished and resourceful divorce attorney in Orange County who understands the nuances of property division for retirement assets and can provide you professional guidance and support.