Dividing financial assets during a divorce settlement is often a complicated situation. When it comes to splitting retirement assets specifically, the process tends to be simpler when compared to other assets. A marriage has a clear beginning and end; those dates can be used to neatly divide 401(k) and IRA earnings. Whatever is accrued during the marriage is deemed marital property.
That said, there are still nuances surrounding the division of retirement funds that CPAs should be prepared to address. The following are five key issues to consider when striving for an equitable distribution of retirement assets.
Equalize by Default
Equalizing retirement assets means splitting them down the middle. For example, if one spouse accumulated $200,000 in their retirement account during the marriage, and the other accumulated $300,000, those amounts are combined and then equalized, meaning that each spouse would receive $250,000.
Pensions Are More Complicated
Pensions are less common today than IRAs and 401(k)s, but they are still a factor in divorce settlements, especially if one or both parties work in the public sector. Pensions work differently than other retirement accounts because there is no immediate cash value—it is a future benefit. In many cases, a divorcing couple hires a pension actuary. Using factors like years worked and years married, the actuary uses a formula to determine what percentage of the pension the other spouse is entitled to once it goes into effect.
Matrimonial attorneys find that people often exhibit a greater degree of protectiveness over their pensions compared to other forms of retirement savings such as IRAs and 401(k)s. Attorneys should anticipate heightened emotions during these settlement discussions. It is not uncommon for clients to become notably worked up over the prospect of their pensions being involved.
It is also important to remember that pension law varies from state to state. New York State, for example, disfavors lump-sum pension payouts. This means New York actuaries rarely determine a current cash value for an immediate pension buy out.
Sometimes, ‘Equitable’ May not Seem Fair
Matrimonial attorneys can encounter situations where there are major financial imbalances. For example, one spouse is a fourth-grade teacher, and the other has a lucrative career as a hedge fund manager. The letter of the law states that one spouse is still entitled to a part of their partner’s teacher pension, even if they have a far greater salary.
Beware Failure to Disclose
Unlike shared bank accounts or house ownership, retirement accounts are held in one name only, meaning that spouses tend to see and know less about their partners’ retirement savings. There have been cases where one party wasn’t honest about their retirement holdings, and it seriously complicated the settlement later on. After discovery and depositions had already taken place, one party served the other a routine subpoena to obtain an updated brokerage statement. That process ended up revealing a hidden IRA account with over $1 million and scuttled the whole settlement. If the spouse lied about that account, they likely lied about other assets as well.
Similarly, a divorce may also reveal that one party withdrew from or borrowed against a retirement account without the other party’s knowledge. When such a breach of trust is uncovered, it can complicate the settlement process.
Think Big Picture
It is important to remember the big picture. While splitting retirement assets may seem like simple arithmetic, the emotional context of a divorce complicates the numbers. Professional advisors will try to get their clients what they’re entitled to, but that individual may also have to navigate issues like co-parenting with their former spouse. In some cases, demanding a meager portion of a pension may not be a worthwhile strategy. Dividing retirement accounts amid a divorce tends to be straightforward, but there can be complications. It is important for all parties, as well as their representation, to know the nuances, act in good faith, and work toward a practical resolution.
