Perhaps you are preparing to file for Divorce and are unsure how to handle your retirement plan in the process. Did you know, in Florida, retirement benefits such as 401(k)s, pensions, and IRAs are considered Marital Property if they were accumulated during the Marriage? Understanding how to handle these assets properly can prevent potential legal disputes that may prolong the resolution of your case. Keep in mind, Family Law Clients who have a valid Prenuptial agreement, may utilize it to determine how their retirement plans should be divided or not divided.
Below is a guide on how to handle retirement plans during a Florida Divorce case.
Identify the Type of Retirement Plan
The first step in addressing retirement plans in a Divorce is identifying the types of retirement accounts involved. Common retirement plans in Florida Divorces include:
401(k) and 403(b) Plans: These are employer-sponsored accounts that are often equitably divided in a Divorce.
Pension Plans: These are long-term retirement plans that provide periodic payments in retirement, often associated with government, some corporate or union jobs.
IRAs (Individual Retirement Accounts): IRAs are often equitably divided in Divorce, particularly if there are significant contributions from both Spouses during the Marriage.
Social Security Benefits: While not divided in a Divorce for Equitable Distribution purposes, Social Security benefits can be considered for Spousal support or for long-term planning.
It is important to determine how much of each retirement plan was accumulated during the Marriage versus before the Marriage or after the Date of Filing the Dissolution of Marriage proceeding, as only the portion earned during the Marriage is considered Marital property.
Contact Professionals
Because dividing retirement plans can be legally and financially complicated, it’s often beneficial to work with professionals such as a financial advisor, forensic accountant, or Family Law Attorney experienced in handling Divorce-related retirement issues. These professionals can help ensure that retirement assets are valued and divided accurately, and that the appropriate legal documents like Qualified Domestic Relations Orders are properly prepared and filed.
Valuation of Retirement Assets
Before dividing retirement assets, it is necessary to accurately value the accounts. This often requires the assistance of a financial advisor. For retirement plans such as pensions, this could mean calculating the present value of the pension, taking into account the benefit amount and the Spouse’s age at the time of Divorce.
For 401(k)s or IRAs, the balance at the time of Divorce is typically straightforward to determine. However, any pre-marital contributions or contributions made after the Date of Filing may be excluded from the Marital property.
Equitable Division in Florida
Florida is an Equitable Distribution state, which means that assets, including retirement plans, are divided fairly but not necessarily equally. The Court will consider various factors, such as the length of the Marriage, each Spouse’s financial contributions, and their future needs. A Judge may award one Spouse a larger share of other assets to balance the division of retirement accounts.
In some cases, couples will reach a settlement through Mediation that divides the retirement funds in a way that is mutually agreeable. However, if a settlement cannot be reached, a Judge could make the final decision.
Qualified Domestic Relations Order (QDRO)
One of the most important documents used in dividing retirement plans in a Divorce is a Qualified Domestic Relations Order (QDRO). A QDRO is defined as a Court order that allows for the division of retirement accounts like 401(k)s and pensions without incurring penalties. It essentially directs the plan administrator to divide the account and transfer a portion of it to the other Spouse.
For example, if one Spouse is entitled to a portion of the other Spouse’s 401(k), a QDRO would specify the amount or percentage to be transferred, and the recipient Spouse would receive their share directly into a qualified retirement account in their name from other party’s retirement plan. This process ensures that the funds are divided without triggering current taxes or penalties, as long as they are transferred into an eligible retirement account.
Tax Considerations
Tax implications are another critical aspect of dividing retirement plans. Transfers of retirement funds via QDROs are generally not taxable events. However, once the money is withdrawn from the retirement account, it may be subject to income tax, and for certain accounts like 401(k)s or pensions, there could also be early withdrawal penalties if funds are taken out before reaching retirement age.
It’s important to consider the tax consequences when settling the division of retirement assets. For instance, the Spouse who is receiving a portion of a retirement account may prefer to receive assets that are more liquid or tax-advantaged, such as real estate or other savings, to avoid the tax burden associated with retirement account withdrawals.
Handling retirement plans in a Florida Divorce requires careful attention to detail, understanding the applicable laws, and considering tax implications. By identifying the type of retirement plan, accurately valuing the assets, and employing the use of QDROs, Family Law Clients can avoid complications and are more likely to achieve a fair distribution of Marital property. For specific tax questions we recommend you speak with your accountant or other tax professional.
Want to speak with an experienced Family Law Attorney regarding your retirement plan as it relates to Divorce? Call our office today to schedule an initial consultation.