You have worked hard your whole life and have continuously contributed to your retirement account so that one day you can have a comfortable retirement.
Now that you are getting divorced, you are terrified that the nest egg you have so carefully saved up your whole life will vanish right before your eyes, to be doled out as part of the division of assets during the equitable distribution proceedings.
If the idea of a court order robbing you of your hard-earned benefits frightens you, you are not alone.
It is true that a 401k and other retirement accounts can be considered part of marital assets under equitable distribution. This makes retirement accounts challenging to divide in half. An experienced family law attorney can be the answer to helping you protect your retirement savings and fight for your rights. The attorneys at the law firm of Melone Hatley, P.C. are here to provide you with legal advice and help you understand what qualifies as separate property under North Carolina state laws so you can fight to protect your savings in your divorce settlement.
The divorce decree is the final step in your divorce process, and formally ends your marriage in the eyes of the law. It outlines all the aspects of what the court has ordered between you and your ex-spouse. This includes alimony, child support and custody orders, visitation schedules, and the distribution of marital property.
What Factors Are Considered When Splitting Marital Property?
The courts consider several factors when splitting up your marital estate. These factors include the duration of the marriage, the income of both spouses, marital property, and the needs of any children involved including issues of support and custody. Debt is also considered, which can include credit cards, mortgages, car loans, and other liens.
There are several varieties of retirement accounts, ranging from savings that your company matches throughout the course of your employment, pension plans that are dependent upon working for a company for a specific period of time, and stock options. The common types of retirement plans can be split up into three categories and are as follows.
401k accounts are the most common form of retirement benefit. They are essentially an investment account that you contribute to, which grows with the market. You usually choose a general level of investment from conservative to aggressive, but some plans may allow you to choose specific companies. The nonprofit version of the 401k is the 403b, which is essentially the same.
Many employers offer fund matching, which means they will equal or even exceed your contribution to the account. This increases your account value, so you get more bang for your buck when you retire. In some cases, you can take out money before retirement, but you will need to pay it back or suffer an early withdrawal penalty, including having the money taxed.
Another, important aspect of a 401K account is that you do not pay taxes on the money you invest into the account. Taxes are collected at the time you withdraw money from the account.
Traditional IRA and Roth IRA Accounts
There are two types of Individual Retirement Accounts (IRAs): the traditional IRA and Roth IRA. Both are a type of supplemental retirement account you can create even if you already put money into an employer-sponsored 401k account. The biggest difference between the two is the tax implications that each carries. Both the traditional IRA and Roth IRA are eligible in part or whole for division during divorce.
A Roth IRA sees you contribute money after you have paid income tax on the contribution, which then grows tax-free; after age 59½, you can usually make tax-free and penalty-free withdrawals. These accounts are generally best for those who expect to be wealthier by the time they start making withdrawals. These funds are not tax deductible.
In a traditional IRA, you can contribute pre-tax, and the money grows tax-deferred. You then pay taxes as income on withdrawals after age 59½. Traditional IRAs are generally best for those expecting to be in the same financial situation when they retire and are advantageous because they let you contribute pre-tax money. Traditional IRAs can offer immediate tax benefits.
You can use either the traditional IRA or Roth IRA as a “rollover IRA.” This is an account that moves funds from an employer-sponsored retirement plan at a former job into an IRA. This allows you to preserve prior tax-deferred status without paying penalties. Take care, however; if you roll over your prior funds into a brand new IRA, your spouse may claim the entirety of this new IRA as marital property during your divorce if you are unable to trace the original source of the funds.
A defined pension plan is available to many military, federal and state government, and union workers. Unlike 401k or IRA programs, this type of retirement plan is not dependent on investments or contributions. Rather, it uses a formula based on your salary and length of employment. Essentially, when you retire from a long-term job offering a pension plan, you continue to get pension payouts for life. Pensions can be some of the most beneficial forms of retirement plans as they are reliable so long as you put in your requisite time. They are not dependent on a fluctuating market, and they do not reduce your regular pay.
What happens to your retirement plan depends on the specifics of your divorce settlement. North Carolina is not a community property state but an equitable distribution state. Despite how this may sound, this does not mean that everything is distributed equally. It means that the judge will determine what is fair for each party to receive.
Equitable distribution depends on what is considered marital and separate property. Any assets or debts that a spouse had before the marriage are considered separate property. Under normal circumstances, these are not divided. A spouse may, however, be able to claim assets based on active increased value during the course of the marriage.
Marital property covers anything that you got during the marriage except for gifts and inheritances from a third party. These are divisible under equitable distribution. A third category also exists, called “divisible property.” This category applies to property that is obtained between the time when a couple separates and when they divorce. Essentially, such property can count as marital property unless the parties have an agreement otherwise.
What about pension plans? You might think that because you do not put your own money into a pension plan it is exempt from marital property. Unfortunately, this is not true. Your spouse may be entitled to half of the earnings that are generated during your marriage. This amount is usually determined by applying the formula for your pension amount and prorating it based on how long you have been married.
The short version of all of this, as it applies to your retirement account, is that even if the 401k or IRA was created before the marriage, and no cash-out or withdrawal has been taken, any money you put money into the account during the marriage can be considered marital property. Because these gray areas permit spouses to apply for a claim to active increased value of assets, it is vital to have a qualified and experienced divorce lawyer in your corner. Contact the award-winning Charlotte family law attorneys at Melone Hatley, P.C. by calling 800.479.8124 or using our online contact form and get a case review today.
A qualified domestic relations order, or QDRO, is a court order that is created as part of your divorce that directs the division of your retirement plan. As stated above, there can be severe penalties and tax implications by withdrawing money from a retirement account before you are eligible; the purpose of the QDRO is to allow for the division of the retirement plan, incident to your divorce proceedings, to occur without penalty.
A QDRO simply directs the plan administrator to send a certain percentage of a retirement account to your ex-spouse. This percentage is decided in the divorce proceedings and will be a part of the divorce order. It is important to understand that the QDRO is separate from the divorce order and is, simply put, a set of directions.
Once the money is divided by the plan administrator following the directions of the QDRO, it will be the other spouse’s responsibility to put the money into a like-kind account, or pay any taxes that may be incurred.
A good attorney can be an invaluable ally in protecting your retirement account interests. They are here to help you fight for the best possible division of your assets, and they will fight to protect you when your spouse tries to demand an unfair amount from the retirement accounts you have worked so hard for so many years to build.
While your spouse may have some claim to a portion of your military pension, IRA, 401k, 403b, or other retirement accounts that have grown since you got married, all too often they will attempt to lay claim to the whole amount. That is neither fair nor equitable. Your attorney will fight to make sure that your spouse gets only what they are entitled to get under the law and nothing more.
It is important to understand that a divorce attorney is neither a financial advisor nor a financial planner. While they have some knowledge in these areas, it is always best to have someone who can help you with the administration of the accounts so you can continue to grow what you have left after your divorce is finalized.
The right divorce lawyer can protect your nest egg and help make sure that you can preserve your lifestyle when you retire. After all, you deserve to maintain your standard of living as much as your spouse.
If you are facing a divorce and want to protect your retirement accounts, the law firm of Melone Hatley, P.C. may be able to help. Contact us at 800.479.8124 or use our online contact form for a consultation about your case today.
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