How Retirement Accounts Are Divided in PA Divorce
Family Law
When you see Hollywood films about people fighting over their marital assets in a divorce, they’re normally talking about family homes and bank accounts. In the movies, wealthier couples might get caught hiding funds in a Panamanian account or stashing stock proceeds with a friend.
While stocks and houses get the attention in movies, a major part of real-life divorce assets is found in retirement accounts and pensions. Most people don’t automatically think of these funding sources because they can’t actually use them until they are 65. However, these accounts are still considered marital assets and must be divided fairly.
Pennsylvania Is an Equitable Distribution State
The first thing to know about how retirement accounts are divided is that Pennsylvania isn’t a 50/50 state. Assets and debts must be divided equitably, but this doesn’t mean that they’ll actually be divided equally. The judge considers your earning capacity, age, health, marriage longevity, financial contributions, and non-financial contributions to the marriage before making a decision about how much to give each of you.
What Is Considered Marital Property for Your Retirement Account?
Another key point to remember is the difference between marital and non-marital property. In general, marital property is any property or debt you acquire after your marriage.
However, this classification can get a little confusing when you look at interest, dividends, and the accrual of value. Let’s assume you contributed $100,000 to a retirement account before you got married. Now, the same retirement account could have $130,000 in it from asset growth. The $30,000 in added value is marital property because the increase happened during your marriage. The original $100,000 would still be considered non-marital property, so the original contributing spouse would keep it.
Anything that is gained in your 401(k), individual retirement account (IRA), pension, or other retirement account is marital property from the date of your marriage onward. After you separate, that growth is no longer marital property. Calculating growth after the date of separation can be tricky, which is why you should always work with skilled legal professionals when figuring out financial issues in your divorce.
How the Division of Retirement Accounts Happens in Pennsylvania
In Pennsylvania, the division of property falls under 23 Pa.C.S. § 3502. This provision includes specific factors that must be considered and how the property should be divided. If spouses cannot reach an agreement on how to divide property, the court shall equitably divide the marital property between the parties involved. In Pennsylvania, marital misconduct is not considered when dividing marital property.
Qualified Domestic Relations Order (QDRO)
The first step in dividing a retirement account is a QDRO. This is essentially a court order that tells the plan administrator how to divide the 401(k) account or pension account without triggering taxes or penalties. The QDRO must be written with precision to ensure you don’t end up getting taxed on the retirement fund transfer.
Your divorce decree isn’t enough to simply transfer retirement funds. To avoid a tax mess, you must have the QDRO approved by the plan administrator before the judge can sign off on it.
Transfer Incident to Divorce (for IRAs)
While 401(k)s and pensions use a QDRO, IRAs don’t require this document. However, the entire process must still be carefully recorded if you want to avoid a hefty tax bill. Talk to your accountant and a skilled divorce lawyer before transferring any IRA funds.
Pensions: The Sleeping Giants of Divorce Assets
Pensions are difficult to value because the future income can vary based on the employer, union, or governing agency. Actuarial tables may need to be consulted to figure out how long the pension would likely be used.
Because of these complications, some spouses take a buyout for the present value of the pension. For instance, one spouse receives cash or assets while the other spouse keeps their pension. In other cases, the spouses agree to divide the future pension payments when they eventually begin.
While a pension might not feel real right now, the payments can quickly add up. Because of this, don’t forget to account for your spouse’s pension when dividing up assets in a divorce.
What About 401(k) Loans, Withdrawals, or Hidden Activities?
Sometimes, one spouse will get a loan from their 401(k) or cash out some of their IRA without informing you. However, this doesn’t mean that the funds are actually gone from the division of assets. Timing and disclosure are key to whether these removed funds are counted as marital assets or not.
To make sure you get the money you deserve, you need to get the full account statements instead of just the summaries. You should go back several years to make sure money wasn’t removed in preparation for an eventual divorce.
Get Professional Assistance in Newfoundland in the Surrounding Areas
If you’re located in Newfoundland, Stroudsburg, East Stroudsburg, Wilkes-Barre, or the surrounding areas, our legal team can help you prepare your legal strategy. The division of retirement accounts requires skilled financial and legal insights. To make sure you don’t get shortchanged, you need the best help possible.
Find out more by contacting our Pennsylvania divorce lawyers today.
