Property Division: Retirement Assets

Property Division: Retirement Assets

November 04, 2020

Not all assets are created equal! When going through divorce, it is incredibly important to understand how each asset's unique features impact the divorce settlement. Lets begin by understanding retirement asset basics.

There are three main categories of retirement assets; qualified, non-qualified, and personal. Qualified means that the assets "qualify" for special tax treatment under IRS's rules and non-qualified refers to assets that do not meet rules to qualify for favorable tax treatment. 

  • Qualified plans are funded with tax-deferred contributions and it is important to consider the tax consequences when finding the true asset value. Account statements will not reflect the amount of taxes due upon withdrawal which can dramatically reduce the listed value. Defined contribution (401k, 403b, and 457 plans) and defined benefit (pension plans) are types of qualified accounts. 

  • Non-qualified plans have different tax consequences and do not have contribution limits. Deferred-compensation, split-dollar life insurance, and executive bonus plans are non-qualified plans. Non-qualified plans are considered assets of the employer and the employee may lose their benefits if they lose their job. Because of their nature, it is important to secure the divorce decree with a backup funding mechanism. 

  • Personal investments are accounts created and managed outside of what is offered through employment channels. Individual Retirement Accounts, ROTHS, brokerage accounts, passive, and portfolio income are all types of personal investments. Technically ROTHs and IRAs are not considered qualified/ nonqualified; however, they do have unique tax consequences. ROTHs are funded with after-tax dollars while IRAs are funded with pre-tax dollars. When reviewing a proposed divorce settlement, it is important to calculate the after-tax value to accurately evaluate the validity and equitability of the settlement. 

Assets are further divided based off of their individual type and have their own characteristics that must be navigated. Here are a few key points when examining the impact of divorce on retirement assets:

  • Defined benefit plans are also known as pension plans and require special skill to properly value. Pension plans do not have a set total value as it is an agreement to play the employee a certain amount each month upon retirement. The calculation is impacted by the employee demographics, length of employment, date of retirement, highest income years during employment, payout options, life expectancy, and interest rate.

  • Employee vesting impacts the total value of the employee's retirement account and it is essential to determine the vested percentage to ensure accurate values. 

  • Avoid the 10% tax penalty for early withdrawal by enlisting Divorce Analytics. Working with us will help you avoid the 10% penalty for premature accessing of retirement assets during divorce. 

When examining divorce settlement proposals, finding the true asset value will prevent from any unexpected consequences. Divorce Analytics helps you properly value each asset by examining cost basis (the original price) and taxation impact.  Protect yourself with our help; email or call 402.430.3092 to get started today! 

Please note: This is general knowledge and is not tax/ legal/ or financial advice. Work with your professional team to find out what is best for you.