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722 - What About Retirement Plans?Retirement plans are sometimes the "hidden assets" in divorce. It's not necessarily that anybody sets out to hide them, although there certainly are cases where people try to keep their retirement plan a secret. The reason retirement s sometimes don't get dealt with is that often neither the spouse who owns the retirement plan nor the other spouse thinks about the possibility that it's a marital asset. In lengthy marriages, the retirement plans of both spouses are marital assets, and they're available for division between the spouses. If the two of you have been married more than 10 years, the portion of the retirement plan that accrued during the marriage could be divided 50/50 if that's what the judge believes is fair. If you need to reallocate a retirement plan in divorce, you may need to use something called a Qualified Domestic Relations Order. You may hear it called a "Quadro." Retirement plans fall into two categories. The most common plan these days is what's called a defined contribution plan. That's a bucket of money in the employee's name. Usually the company adds to the bucket each year, and what's already in the bucket gets invested and earns additional income. You can tell at any given point what the plan is worth, because the plan administrator sends out statements about it every few months. Some examples of defined contribution plans are 401 (k), 403(b) and profit sharing plans. The other kind of plan is what's called a defined benefit plan, sometimes called a pension. There was a day when pensions were the most common plan, but they're less common nowadays. A pension plan doesn't involve a bucket of money today. Instead, it's in the form of a promise the company makes to pay some stated benefit to the employee during his or her retirement. Divorcing couples, and the lawyers who represent them, often fail to account for the value of a defined benefit plan interest, because they don't know what it's worth. That can be a big mistake, because a pension can sometimes be the most valuable asset of the marriage. Better to talk to someone who can estimate the value of the pension. Then you and your spouse can negotiate with full knowledge. One issue that's easy to miss with both defined benefit and defined contribution plans is the tax impact of taking the money out and spending it. Specifically, anybody who takes money out of a retirement plan has to pay income tax on it, and if you're taking money out of your own plan before retirement age, you'll probably have to pay a 10 percent penalty on top of that. Alabama Family Law Center serves clients who need to get through divorce and who are able to be reasonably cooperative. The goal is for both spouses to survive divorce and move on with their lives with some money in their pockets and their dignity intact. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers. If you'd like to make an appointment with me, call 205-979-6960. Or you can click here to return to the Divorce Line. |
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