Dividing Retirement Accounts in a High-Asset Divorce

 Posted on April 08,2015 in Complex Property Litigation

A retirement plan may be one of the largest assets in the marital estate, especially in a high asset divorce case when the parties have been married for a number of years. Section 7.003 of the Texas Family Code authorizes the judge "to determine the rights of both spouses" with regard to a defined benefit pension plan or a defined contribution retirement plan, such as a 401k or IRA.

Each plan is different and has its own rules. Some plans, most notably military retirement plans and some other accounts related to federal government employment, require a special Division Order, as opposed to a Qualified Domestic Relations Order (QDRO). It is important that the QDRO or other order be timely and accurate, or else the IRS may assess taxes and penalties against the Alternate Payee, or non-employee spouse.

Payment Options

A defined-benefit plan may have no cash value at the time of a complex divorce, unless it is vested. So, the Alternate Payee is generally limited to a share of future payments. However, if the nonemployee spouse has an immediate financial need or wants to make a major purchase, there are some other options.

An aggressive divorce attorney or qualified financial professional can estimate today's cash value of future payments, after considering lifespan calculations, the probability of future vesting, inflation, and other factors. An agreed amount can be offset elsewhere in the high net worth divorce's property settlement – for example, a spouse could trade a share of a stock portfolio for a stake in future pension payments – or a lump-sum spousal support payment can compensate for the loss. The language must be carefully crafted to avoid IRS scrutiny and possible penalties.

A defined contribution plan typically works a bit differently, and the Alternate Payee may have several options, depending on the plan rules:

• Lump Sum: Alternate Payees who liquidate their shares will probably pay an early-withdrawal penalty but avoid any other financial sanctions.
• Separate Account: The Plan Administrator can split the account, and the Alternate Payee receives a share of future payments. Although the Alternate Payee usually cannot make any future voluntary contributions, this method requires the least effort and paperwork.
• Rollover: Most Alternate Payees elect to take their share of the funds and create another tax-deferred account, such as an IRA.