Nolo's Essential Guide to Divorce - Emily Doskow [121]
This section discusses four types of retirement benefits. They're all very different, and you'll use different methods to determine their value and divide them.
Withdrawing Money From Retirement Plans
If you want to buy out your spouse's share of your own retirement benefits (or the house, for that matter) by paying cash, your retirement plan might look like a ready source of funds. Generally, you can't take money out of a defined benefit (pension) plan. If you have a defined contribution plan, such as a 401(k), you can borrow or withdraw your own money-the contributions you have made-at any time. But withdrawals have serious penalties. First, if you withdraw money before you are 591/2, you will probably have to pay a penalty. Second, if the contributions were tax deductible when you made them (as some traditional IRA contributions are), you'll have to pay tax on what you take out in the year you take it.
You can borrow money from your own (non-IRA) retirement plans, but unless the loan was for the purpose of purchasing a home, you have to repay it within five years. If you don't, the loan will be considered a withdrawal, and you'll owe taxes and penalties.
For everything you ever wanted to know about getting money from your retirement accounts, see IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out, by Twila Slesnick and John C. Suttle (Nolo).
Defined Benefit (Pension) Plans
Defined benefit plans, or pensions, used to be common, but nowadays they've mostly disappeared unless you're a highly compensated executive. If your company offers a defined benefit plan, it's an automatic benefit of employment your participation isn't voluntary, and you don't make any choices about contribution levels or anything else. The benefits accrue while you work for the company, and when you retire you get either a lump sum distribution or a monthly payment. The payment amount is either preset under the terms of the plan or determined by a formula that takes into account your years of service, salary, and other factors.
In almost all cases, pension money becomes available only when the employee-spouse retires. When you get divorced, all you can do is to decide what percentage of the payment each of you will eventually get.
Valuing the Plan
Defined benefit plans are difficult to value, because the payout is planned for the future and money has a different value in the present than it will in the future, and because a number of factors go into projecting the future monthly payment, including salary levels and years of service. You'll need an actuary to figure out the present value and then calculate the marital share.
When you have the actuary evaluate the defined benefit plan, the result is going to be a formula that uses three pieces of information:
1. The actual amount that the employee spouse will get (usually monthly) upon retirement.
2. The share of the benefits that is marital property. For example, if the employee spouse worked for 20 years and was married for 15 of those years, 75% of the benefits are marital property and the remaining 25% belongs to the employee spouse alone.
3. The percentage of the marital share that the employee spouse is receiving.
You'll know items 2 and 3 at the time of your divorce, but you won't usually know Item 1 until the employee spouse retires.
If you're the nonemployee spouse, your spouse's attorney might try to talk you into estimating the amount and agreeing to a fixed monthly payout starting when your spouse retires. Don't agree to that. Make sure the actuary creates a formula for the court order using the factors listed above, so that you get your full share of the pension benefits when your spouse retires.
Dividing the Defined Benefit Plan
Just as you can arrange for one spouse to buy out the other's interest in the house, you