Methods for Dividing Retirement Benefits in Divorce
Retirement benefits, including military retirement benefits, are considered assets in a divorce action (rather than income). Most states divide assets equitably; however, equitable does not necessarily mean equally. To divide assets in an equitable fashion, the court looks at several things, including the parties' non-marital estates, present earnings and future earning capabilities.
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QDROs
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If the court orders the parties to split a retirement account, a Qualified Domestic Relations Order (QDRO) must be entered by the Court. The QDRO dictates the terms to the company providing the retirement account. Retirement accounts are usually provided through the petitioner's or respondent's place of employment. If the party is self-employed, the retirement account may be through another company, such as H&R Block. Because only the person who owns the retirement account has access to the account, these companies must have an order to split the account. The money that is split is rolled over into an account for the receiving party or is forwarded to the receiving party via check.
Settlements and QDROs
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Even if the parties settle the matter amongst themselves, a QDRO is often needed to remove money from a retirement account early. When creating a settlement agreement, always try to divide the assets in such a way that the retirement accounts do not have to be split between the two parties. An attorney must draft a QDRO (or a company that works specifically with QDROs), and it can be a very expensive document.
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Division of Retirement Accounts-Whole Accounts
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If possible, the parties should keep their own retirement accounts. If one party's account is larger than the other party's retirement account, offset the difference with another asset. The other asset can be extra equity in the home, another smaller retirement account, an extra vehicle or any other asset. If the parties can each keep the retirement accounts in their individual names, there is no need to draft an expensive QDRO.
Division of Retirement Accounts-Payments
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Another way to avoid paying for and entering a QDRO is to set up payments on the retirement account. This is usually only feasible if one of the parties is already receiving the proceeds to the retirement account and she is receiving the proceeds in the form of payments (rather than a lump sum). When payment is dispersed to the retirement account owner, she forwards the ex-husband's share of the payment. Payment may be forwarded by check or it may be forwarded via electronic transfer directly to the husband's bank account. Most banks will now allow the scheduling of automated transfers from one account to another.
Division of Retirement Accounts-Without Cashing Out
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If the party who owns the retirement account has to pay the other a set amount of the account, but he does not want to cash out the account, he can pay his wife in a lump sum garnered from other assets. If the husband's share of a joint savings account is large enough, he can simply pay her a lump sum to cover her share of the retirement account. When the husband starts receiving payments from his retirement account, he keeps all the payments, since the wife was "paid off" via a savings account.
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