As with other assets and debts in a divorce, there are four basic steps involved in determining what you are going to do with the retirement accounts:
- list them all out;
- value each one;
- characterize each one as separate property, community property or a mixture of the two;
- decide who gets how much of the mixed and community property ones.
Valuing Retirement Accounts
You can value defined contribution accounts (such as 401ks, 403bs and 457s) using the monthly or quarterly statements that are issued by the financial institution. Usually you would use a single agreed-upon valuation date for most or all of the accounts.
Valuing a defined benefit account (a pension) is more difficult because it is a future stream of money. In most cases, a financial professional called an actuary is hired to calculate the present value of a pension. Then the pension’s present value can be compared with the other retirement accounts and assets.
Each retirement account is in the name of one spouse or the other. Nonetheless, contributions that occurred between the date of marriage and the date of separation are considered by the law to be community property. So are value changes from these contributions that occurred between the date of marriage and the date of separation.
Dividing Retirement Accounts
With each account that is partly or entirely community property, you need to decide whether it will:
- stay with the spouse named on the account
- transfer in its entirety to the other spouse or
- be divided in some specific way.
If divided, the exact division should be specified in the settlement document you create on your own or perhaps with the help of a mediator. This could be a dollar amount or a percentage or some formula.
You can save on divorce costs if in your divorce settlement you minimize the number of accounts you divide or reassign. Of course, this is not the only consideration.
You save on divorce costs this way because each non-IRA retirement account that you decide to divide or reassign requires a special court order called a QDRO. And each QDRO will cost roughly $1,000.
Retirement accounts usually fluctuate in value depending on how they are invested in the financial markets. This need to be taken into consideration. If an account is to divided by means of a QDRO, it will take months for the division to actually take place. You should decide and be clear in your settlement document as to who will bear the risk of value fluctuations in the meantime.
Money in a checking account is completely liquid (available for use at any time) and can be used without any tax consequences. Retirement accounts are different. They vary in liquidity and the tax consequences associated with taking money out of them. Withdrawals from most retirement accounts are taxed just like ordinary income. Therefore, it’s wise to understand and take into consideration the liquidity and tax implications of each retirement account. A Certified Divorce Financial Analyst or other financial professional can assist you with this.