It's my pension. Do I have to give 50 percent away?

Pensions and other retirement accounts are valuable. They provide crucial income when the time comes to stop working. They are also a reflection of your career. You spent years making small contributions of money you could have spent elsewhere. The funds are your nest egg for the future, and you want to keep them intact. Do you have to give half away when you file for divorce?

Florida community property laws give each spouse an equal interest in all assets. This does not mean you have to divide every single asset in half, but you can. It is not uncommon for spouses to divide retirement accounts. When you do this, it is important to not only consider all of the potential ramifications but also take the appropriate steps to ensure you do not make costly mistakes or incur unnecessary losses.

ERISA compliance

In the United States, the majority of retirement plans in the private-sector receive favorable tax treatment due to their design and maintenance through compliance measures with ERISA. There are three main guidelines:

  • Contributions to the plan may be deducted by the employer.
  • Tax liabilities may be deferred by employees for plan contributions.
  • Participants are not taxed on funds as they grow tax-free in the plan. When the participant withdraws funds, they are taxed at that time.

Five potentially costly mistakes

It is a common scenario: he's a younger middle-aged man, has developed a nice retirement, and has concerns regarding the division of these assets during his divorce. She wants a share to ensure that she'll have security.

By following the advice of a great attorney and considering the five issues below, it's possible he doesn't have to take any of those unnecessary losses.

  • Tax liabilities: Tax liabilities may arise from cash distributions received from QDRO transfers, so it's critical to anticipate this to minimize or avoid them. When our earner elects to take all or a portions of funds from the benefit in cash, expect to incur an early distribution penalty and income tax liability.
  • Pension division: Our earner must determine the approach of the pension division, be it shared or separate interest, and define it clearly. Consider the benefits and consequences of each approach and how elections will affect survivorship options for each spouse.
  • After-tax contributions: Some 401(k) plans allow for after-tax contributions, which mean dividing the tax basis. The IRS recently issued a ruling that allows for a smoother rollover of these assets from a 401(k) to a Roth IRA, but the benefit given to the former spouse should be broadly defined as to include a pro rata share.
  • Annual employer contributions: Do not forget about pro rata shares when our earner's company makes annual contributions to a plan. No matter when the divorce date, it's critical for the spouse to broadly define the former spouse's interests.
  • Formula for tax consequences: The recipients of non-qualified plans always have tax consequences when receiving distributions from them. These benefits are not immediately divisible, so tax implications must be accounted for in the future.

It's critical for those who are dividing assets during a divorce to address these issues before the finalization of litigation. These efforts will help them avoid unintended and inequitable results. The ultimate goal is to find protections for both parties from litigation post-divorce.

Should questions arise regarding the division of retirement assets, it's essential to hire and pay for an attorney with extensive experience handling high-net-worth divorces with such complexities, so assets receive that protection.

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Amy L. Beauchaine, Attorney at Law
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