Divorce is a stressful time in life; even an amicable divorce requires substantial paperwork and the division of assets. These assets can include retirement accounts. Which leads to the question of how divorce and retirement benefits can be settled.
There are various benefits available in retirement such as pensions and 401(k)s that require specific criteria in order to disburse or divide them, a process which can add further complexity to divorce proceedings.
For partners who are separating and divorcing, this guide serves as a primer to understand divorce and retirement benefits, including what can be divided between the parties, how that division is determined, and how to avoid unnecessary penalties and fees in the process.
Who Is Entitled to Retirement Benefits in Divorce?
Retirement benefits can be granted to either party in a divorce. If both parties have separate types of retirement accounts, both may be ordered to split those accounts between each other. However, neither party is inherently entitled to seize retirement benefits from the other party in a divorce.
Retirement savings are just another element of the total asset mixture that each individual carries. In some cases, other assets may be used to fund the requisite compensation for the other party, or the funds in a retirement account may not be eligible for seizure based on the time at which they were contributed.
How Are Divorce And Retirement Benefits Settled?
In Maryland, marital assets are divided based on what is equitable, not necessarily what is equal. This means that if one spouse is earning significantly more than the other, more of their assets may be given to the other partner than what the low-earning partner is ordered to give.
Assets include physical possessions as well as homes and cars, as well as less tangible items such as bank account balances and retirement accounts. It is common for some portion of an individual’s retirement to be granted to the other party in a divorce.
While the most frequent types of retirement investments are housed in 401(k)s, Roth IRAs and similar accounts, these are not the only assets eligible for division during divorce. Pensions and annuities can also be claimed, even if they have not yet begun to pay.
Shielding Retirement Benefits from Divorce Settlements
While a court can order one party in a divorce to liquidate part or all of their retirement funding to the other party, there are options that shield some or all of this type of asset from seizure in certain circumstances. The most common of these is for premarital contribution.
In Maryland, a person’s estate is divided into marital and non-marital property—that is, those assets that were acquired before, and after, the marriage was legally recognized. If an individual’s retirement account is made up of funds that were entirely contributed in the non-marital stage, none of those funds are eligible for payment to the other spouse during a divorce.
A legal professional can help you to understand which of your assets are eligible for forfeiture to the other party and how to protect them when possible. The burden of documentation for non-marital assets is on the person who owns them, not the party who is claiming them as payment during the divorce.
Avoiding Financial Consequences of Early Liquidation
Cashing out retirement accounts early can have significant financial consequences; for example, early withdrawal from a 401(k) elicits a 10% penalty. However, a QDRO or qualified domestic relations order can grant the 401(k) administrator the authority to release the funds without levying the penalty. This paperwork must be completed when the divorce is finalized, then submitted appropriately.
In the case of pensions or other types of non-savings retirement accounts, the divorce decree must typically state an explicit order to claim the funds; this will include a percentage paid. Otherwise, the receiving party may not be eligible to claim the funds, even if they were summarily awarded them by the court.
Failure to properly fill out paperwork and create the divorce agreement from a legal standpoint can render the funds forfeited, regardless of whether the court awarded them to a specific party. This is why working with a legal team to review the divorce and retirement benefits is crucial during the divorce process.
Preserve Retirement Benefits with the Help of Legal Professionals
The complexity of divorce paperwork and finances is an additional stressor during this already difficult time. The attorneys at Milstein Siegel strive to make the process easier to navigate by providing comprehensive legal advice and guidance for preserving retirement benefits and securing what you are entitled to.
Contact us to schedule a consultation to discuss the financial details of your partnership and establish a robust and equitable agreement for the division of funds.