Retirement Accounts
Summary in Divorce

For many workers, retirement accounts now replace the defined benefit plan -- the so-called company pension, which for many years helped guarantee a secure retirement for millions of people.

The phrase retirement account is a general one referring to money set aside in anticipation of the so-called "golden years." It includes a variety of
individual, professional, tax-sheltered or tax-deferred accounts such as IRAs, SEPs (which are Simplified Employee Pension Plans), Keoghs, ESOPs, 401(k)s, 403(b)s and 457s.

The phrase retirement account may be used to include the 401(k), which is
a defined contribution plan -- an individual or separate account in the employee-spouse’s name, whereby the worker contributes pretax dollars to his or her account that are matched to a certain amount by the employer’s contribution. The phrase retirement account is not normally used to include the vanishing old-fashioned company pension, which is a defined benefit plan paid entirely by the company.

Retirement accounts are marital property; indeed, pensions and retirement accounts and houses are the two most valuable assets a couple divide in a divorce.

In a divorce, the value of retirement accounts is easy to calculate: it is simply the balance in the account. Unlike a defined benefit plan (the old fashioned company pension), the value of a defined contribution plan can fluctuate dramatically after a couple separate but before they divorce.
Classification disputes are very likely when a worker earned some of the benefits prior to his or her marriage.

Like other tax-deferred or tax sheltered retirement plans (the
IRA, SEPs (which are Simplified Employee Pension Plans), Keoghs, ESOPs, 401(k)s, 457s and 403(b)s), defined contribution plans carry penalties for early withdrawal.

One of the most popular is the individual retirement account (IRA). IRAs must be "rolled over" in a divorce to avoid a tax penalty. A nonemployee spouse who takes the money directly is subject to a 20 percent withholding by the I.R.S.; therefore, these accounts must be rolled over when they are distributed as part of a divorce.

An IRA is a tax-deferred asset, and its transfer is tax-free if it is transferred directly -- that is, rolled over -- to a nonemployee spouse’s IRA. Divorcing couples who transfer IRAs as part of the division of marital property should state that the transfer is being made "trustee to trustee" in their separation agreement. Thus, QDROs, which divide pension plans, are not needed to divide IRAs, even if the IRA is a rollover from a qualified retirement plan.

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