All significant assets or debts in a divorce should have a value assigned to them. Retirement accounts are often among the most valuable assets divorcing couples have. Therefore, determining their value is particularly important. The are two main types of retirement accounts:
– Defined contribution accounts such as 401ks, 403bs and IRAs
– Defined benefit accounts such as pensions
401ks, 403bs and IRAs are easily valued using the periodic (monthly or quarterly) statements that are issued by financial institutions.
Usually you would use a single, agreed-upon valuation date for the different accounts so that their values are consistent. When you are working out your own divorce settlement, perhaps with the assistance of a divorce mediator, this date can be whatever you can agree upon. For example, it might be the date of separation or it might be a recent month end.
Valuing a pension is more difficult because the statements don’t give a present value. Instead the pension plan administrator provides an estimate of a future stream of money, say $2,000 per month starting at age 60. Usually in a divorce, a financial professional called an actuary is hired to calculate the present value of a pension.
This is because pensions are often worth a very large amount of money in today’s dollars. And without a present value, it’s not possible to compare with any accuracy the value of the pension against the other assets. A judge may be reluctant to sign off on a divorce settlement unless the present value of the pension has been determined and made clear to both spouses.
Obtaining a present value computation from an actuary is not expensive. Most charge between $100-200 for this service.
If you are certain the value of a pension is very small, it may not be necessary or worthwhile to pay for a present value analysis. About the only other good reason not to get a present value analysis is if you agree to split the community property interest in the pension 50/50. In this case, it doesn’t really matter what it’s worth in today’s dollars because whatever it is, you are each getting half of it.
Taxes and Penalties
The value of retirement accounts can also be affected by tax and penalty consequences associated with withdrawals. This will be the subject of my next post.