Understanding How Retirement Benefits are Affected by Divorce


The dissolution of a marriage is difficult emotionally. However, many people quickly discover that the pain of divorce is not just emotional. It is financial as well. Therefore, when going through such proceedings, it is absolutely essential to be well informed, especially where retirement benefits are concerned.

In order to proceed, it is important to understand the idea of community property. When a court considers the division of assets, it first decides which assets belong to which party and which ones are community property. It may be tempting to think that retirement benefits, IRA accounts and 401k accounts are linked specifically to one person, but court cases have established that benefits and money earned during the course of a marriage are community property. Therefore, they must be divided during the dissolution of the union.

However, how these benefits are divided will vary to some degree. When it comes to 401k and IRA accounts that were established prior to a marriage, the court will consider the time apportionment rule. This rule was established by Gemma v. Fondi and takes into consideration the amount of funds earned prior to marriage and separates them out from the funds earned during the marriage.

In cases that involve profit sharing or a defined benefits plan, the court will consider various factors. To start, it is important to calculate how much money went into either plan during the course of the marriage. This can be difficult with a defined benefits plan, which is calculated on a number of elements. Therefore, to get accurate numbers, many people hire an expert to properly assess the accounts. Then the court will divide these assets based on those numbers. Individuals will then receive money from profit sharing plans and defined benefit plans based on the modified numbers from the settlement.

In addition to a settlement or divorce decree, a Qualified Domestic Relations Order is also critical. A Qualified Domestic Relations Order, or QDRO, is a legal document that must be provided to the 401k provider, detailing how the assets are to be divided. The nuances involved in dividing assets and establishing a QDRO can be difficult to understand, which is why it is so important to have an experienced lawyer help with the process. Only a legal expert can ensure that assets are justly divided and that the maximum amount of benefits are retained by the party that earned them.

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