Dividing Retirement Plans After a Long Marriage – Who Gets What?

By Beverly Bird ; Updated June 15, 2017
Signing  divorce papers

There’s never a good time for divorce. Having young children can prompt a custody battle, but waiting until they’ve flown the nest has its own unique problems as well. Retirement may be on the horizon by now, and alimony is often a factor after a long-term marriage. If you part ways just as you’re beginning your golden years, who gets the retirement funds?

What Part of Retirement Plans Are Divisible in a Divorce?

Courts in all states take the position that anything earned or acquired during the marriage is marital property and is therefore subject to division in a divorce. This presents some unique considerations with regard to retirement assets like pensions or other benefit plans because the key words here are “during the marriage.”

If you were hired by Company A and began making contributions to a retirement plan in 1995, then you got married in 1998, the value accumulated these first three years is not considered a marital asset. It was solely yours before you married so it remains yours if you and your spouse part ways.

Now fast forward to 2018. The 20 years’ of contributions earned from 1998 to 2018 is marital property. Your spouse receives a share of this portion should you divorce, assuming you were married the entire time.

Anything contributed or earned after the date of divorce – or, in some states, after the date of separation – is also your separate property. At least one state appellate court in New Jersey has even ruled that if your retirement fund significantly grows during this post-marital period, such as due to a significant pay raise, any increase in the ultimate payout at retirement time should be factored in as your separate property as well.

That said, some retirement benefits are exempt from distribution entirely because they’re covered by federal – not state – law. They include Social Security and railroad retirement benefits. These aren’t considered marital assets no matter when you earned them and are not divisible in a divorce.

How Is the Marital Portion of a Plan Divided?

The marital portion of a retirement plan is calculated according to something called a coverture fraction: Divide the amount of time you worked and contributed to the plan and were also married by the total number of years you worked and contributed. This method is typically used with deferred compensation plans and pensions. The calculation for defined benefit plans is multi-faceted and far trickier, typically requiring the assistance of an accountant or other financial professional.

If you live in an equitable distribution state – and most states follow this doctrine for dividing marital property – the court will apportion marital assets, including your pension or 401(k), in a way that seems fair or “equitable” considering various factors unique to your marriage, typically including the length of the marriage. The longer the marriage, the more likely it is that the value of an asset will be divided close to equally between divorcing spouses, but it may or may not be a 50/50 split.

Nine states are community property states: California, New Mexico, Louisiana, Arizona, Idaho, Nevada, Texas, Wisconsin and Washington. Marital assets are pretty much scissored right down the middle if you divorce here, including the marital portion of retirement plans.

Whether it’s a 50/50 split or something closer to 65/35, the court can retain jurisdiction over the matter until retirement time and distribute pension-type benefits between spouses then. Otherwise, it might award other marital property of equal value to the non-earning spouse at the time of the divorce. Retirement accounts like IRAs can be divided immediately.

Are There Tax Effects If a Retirement Asset Is Divided at the Time of the Divorce?

Yes and no. Normally, any early distribution from a retirement fund results in a 10 percent tax penalty, but this can be avoided if you give your spouse a portion of your IRA due to divorce, even if you haven’t yet reached age 59 1/2. You have to take an extra step and have a qualified domestic relations order drawn up, in addition to your divorce decree. The decree must specifically state that your ex is being awarded this share of the plan pursuant to your divorce, and the QDRO must be signed separately by the judge and forwarded the plan administrator. This applies to benefits like SEP IRAs, 401(k)s and pensions.

In the case of accounts like IRAs, the funds must immediately be moved into another retirement account owned by your spouse. Or, if she’s receiving the entire account in exchange for you receiving a marital asset of equal value, you can simply change the name on the account from yours to hers.

Will Your Spouse Still Be Entitled to Alimony?

The length of the marriage is also a critical component of whether the court will order a higher-earning spouse to pay alimony or spousal support so the other spouse can maintain a post-divorce lifestyle at least somewhat comparable to that which she enjoyed while married. The longer the marriage, the more likely it is that you will have to pay alimony if your income exceeds that of your ex, particularly if she, too, is near retirement age. She may not be able to secure a job with sufficient pay at her age to allow her to live comfortably. Courts take the position that she shouldn’t have to live in squalor while you live comfortably.

But this assumes you’re working and earning a nice living. What if you’ve retired or you’re about to retire? If the court has retained jurisdiction over your pension and a QDRO has been implemented, her share of that benefit should begin going directly to her at the time of your retirement. If you’ve been paying alimony, you may be able to file a motion with the court, asking that it be terminated at this point. At the very least, it can be recalculated and the amount adjusted downward to reflect this retirement income she has now that she didn’t have before. Allowing her to collect both sources of income would effectively be double-dipping.

The trend in most states in the millennium is that alimony should terminate or be adjusted when the paying spouse retires, at least at full retirement age. If you attempt to retire at age 50, the court may not be so sympathetic.

About the Author

Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.