How to divide Retirement accounts in a divorce

How to divide retirement accounts in a Michigan divorce:  When property is divided in a divorce, lawyers and judges typically focus on property acquired during the course of the marriage.  Retirement accounts are considered property and come in all shapes and sizes.  So what are the major types of retirement plans and how do we divided them in a divorce?

Individual Retirement Arrangements (IRA):  IRAs allow you to make tax-deferred investments to provide financial security when you retire.  There are two types of IRAs a traditional IRA and a Roth IRA. 

Distributions under a Traditional IRA are taxable and subject to a 10% penalty if you are under the age of 59 ½.

Distributions under a Roth IRA are generally not taxable but subject to a 10% penalty if you are under the age of 59 ½.

How to divide and IRA:  In a Michigan divorce, Individual Retirement Arrangements are typically divided by rolling over the marital portion to a new account.  The marital portion is typically ½ of the contributions and earnings from the date of the marriage to the date of the divorce.  To help your lawyer calculate the marital portion we obtain a balance of the account closest to the date of marriage and a balance closest to the date of divorce.

401(k) Plans:  Allows employees to contribute a portion of their pre-tax wages to individual accounts.  (typically a brokerage account) Distributions, including earnings are generally includable.

Distributions under a 401(k) are taxable and subject to a 10% penalty for early withdraw.  However, under certain circumstances, transfers and withdraws incident to a divorce can avoid a 10% penalty.

How to divide a 401(k):  In a Michigan divorce, 401(k) plans are typically divided like IRAs by rolling over the marital portion to a new account.  The marital portion is typically ½ of the contributions and earnings from the date of the marriage to the date of the divorce.  To help your lawyer calculate the marital portion we obtain a balance of the account closest to the date of marriage and a balance closest to the date of divorce.   Unlike an IRA, a 401(k) requires a Qualified Domestic Relations Order (“QDRO”).   A QDRO is a special order entered under Federal Law (ERISA) and names someone other than the 401(k) participant as the recipient of the asset.

Defined Benefit plans:  A defined benefit plan is typically called a pension plan.  Unlike a 401(k) or an IRA which allow an employee to make allow you to make tax-deferred investments, in a defined benefit plan the employer contributes to a plan and pays out a defined benefit upon retirement.

How to divide a defined benefit plan or pension plan:  In a Michigan divorce, defined benefit plans are typically divided by first determining the portion of the plan that was earned during the marriage and submitting a Qualified Domestic Relations Order (“QDRO”).   A QDRO is a special order entered under Federal Law (ERISA) and names someone other than the pension participant as the recipient of the asset.

Related Articles:

Avoiding a 10% penalty:  https://www.thedivorceguy.com/retirement-and-divorce-without-a-10-penalty/

Dividing pension benefits:  https://www.thedivorceguy.com/dividing-pension-benefits-not-all-language-is-created-equa/

We are here to help you navigate this journey by focusing on your goals.  If you have any questions concerning any aspect of the law, let me know. My direct line is 248-399-3300 or toll free: 877-968-7347.

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By:  Daniel Findling

The Divorce Guy, Michigan Divorce Attorneys and Specialists

www.thedivorceguy.com

www.divorceforum.com

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