Divorce is an emotional roller coaster. From early talks of separating to final discussions on settlement, individuals must deal with feelings of loss, anger, and fear. No one, but no one, goes through a divorce without experiencing some emotional backlash. Perhaps surprisingly, discussions surrounding the division of retirement funds are among the most unsettling of negotiations. While most couples understand that the marital home is a shared asset where they lived together and, at least to some extent, worked together to finance and manage, individuals can be fiercely opinionated and possessive when it comes to discussing their collective pool of retirement holdings.
“I earned the money. You did not come to work with me. How can you even consider this money as yours?” This quotation represents a common reaction to a spouse’s learning that retirement holdings constitute a marital asset. Many individuals express disbelief and even anger at any suggestion of sharing their retirement funds in the divorce settlement.
Yet, a marital asset it is, and share many do. Let’s look at the options.
Some agreements are based on a totaling of all retirement funds and a tax-free transfer from the “higher” holder to the “lesser” holder in an amount sufficient to create two equal accounts. As long as moneys are transferred from one retirement fund to another, there are no tax implications. For qualified plans (e.g., 401k Plans), a Qualified Domestic Relations Order, or QDRO, is required for funds to be released and subsequently transferred to the recipient spouse.
For individual retirement accounts, known as IRAs, the tax-free transfer can actually be effected by the couple provided it occurs after the finalization of the divorce.
Other couples agree to trade assets. Perhaps one individual retains the house and the other retains the retirement funds. Here the debate often centers on valuing the items to be traded. The “keeper” of the house might argue for a reduction in valuation for anticipated future capital gains taxes, for real estate broker’s fee if sold at a later date, or for repairs, and so on. Conversely, the “keeper” of the retirement funds might argue for a reduction in valuation for future taxes on this pre-tax holding. The resolution of this debate is by no means uniform. Some couples do discount houses for anticipated expenses based on a future sale. And, some couples do discount retirement funds by a projected tax impact. Yet other couples do not. It is by no means atypical for parties to argue that the house is not being sold and therefore a deduction for an event that may never occur is unacceptable. Likewise, parties not infrequently posit that the tax-deferred growth characteristic of retirement funds more than compensates for its future taxability.
There is simply no uniform argument and no one right resolution of the debate. Individuals need to weigh each one’s sense of fairness and his and her best guess as to future outcomes. Some couples deal with the unpredictability of future costs by agreeing to share expenses if and when they occur, usually within a restricted time frame.
Then, too, there are couples who share parts of all assets. For instance, one party may continue to have a, say, 25% interest in the future sale proceeds of the marital home in exchange for a disproportionate sharing of the retirement funds. The creativity of individuals results in seemingly endless approaches to divvying up the so called marital booty.
Not to be forgotten are defined benefit plans, commonly known as pensions. Whereas not long ago, many companies provided pensions to their employees, today this is becoming less and less of an employee benefit. A pension offers employees a promise of a future income stream, not unlike the annuity of social security. These plans need to be valued by an actuary to ascertain their present day value, often a considerable sum, which is the main reason why pensions are vanishing from the business landscape. Here, too, plans can be actually divided such that each spouse receives a share of the payment when it becomes available. Or, one party can trade his/her interest for a different asset such as a house.
Decisions on pensions are laden with complications, not the least of which is the unavailability of funds prior to the employee spouse’s earliest age of eligibility. Holders of 401k Plans or IRA(s) can draw upon their funds even if subject to penalties. Pension holders cannot access their plans since they have “a promise” of payment, not a “real” fund in their name.
More than any one retirement holding, negotiations surrounding employee pensions are highlighted by passionate expressions of ownership. Perhaps it is the employee’s lack of access to the funds or even knowledge of its real value that imbues this asset with a kind of intimacy and attachment not as commonly attributed to 401k(s) and IRA(s).
Regardless of individual possessiveness or one’s sense of reality, retirement funds, of all kinds, are marital assets. Like it or not, want it or not, divorcing couples need to determine who gets what funds and under what terms and conditions. At the Centre for Mediation & Dispute Resolution, while recognizing the emotional “pull” of these holdings, we also understand the need for couples to think collaboratively and creatively in approaching this very difficult subject. The exploration of different options and understanding the real “value” of all assets under consideration helps couples to fashion an agreement that both feel is fair.
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