Depending on your goals for retirement savings and the circumstances that you find yourself in, you may be in a position where you will want to deviate somewhat from what I will discuss with you today. However, I believe that a great deal of what I am going to tell you about will be helpful for you as you.
Keep in mind that there are two types of retirement plans. The first is a defined contribution plan, which most of us think of when we consider a general "retirement plan" in our minds. This type of plan is sponsored by your employer and allows you to have an individualized account in your name. You can make contributions to the account, as can your employer. Individual Retirement Accounts (IRA), 401(k) accounts, and 403(b) accounts are the most common types of these defined contribution plans.
Whether the accounts are "after-tax" or "pre-tax," your contributions to these plans may not be taxed. If the taxes are deferred, you will pay taxes whenever you take the money out based on your income tax percentage that applies to you in the future. The earliest you can take the money out of a plan such as these is 59 ½. You are limited to how much you can pay for each of these accounts every year.
How a Roth IRA may make sense for you as a retirement savings vehicle
A Roth IRA is a type of defined contribution plan. Whereas a non-Roth IRA allows you to invest pre-tax dollars through a deduction on your income taxes, a Roth IRA sees you pay your taxes now rather than later once you reach retirement age. If you are a relatively young person, you can expect that the vast majority of the money in your account at retirement age will be growth. That means you could have paid taxes only on the relatively small amount of money that you invested in the fund while the change is all been made on a tax-free basis.
Defined benefit plans examined.
As opposed to defined contribution plans, a defined benefit plan is commonly referred to as a pension plan. It operates differently from retirement accounts that we detailed in the previous sections. A defined benefit plan calculates benefits for individual participants based on a formula that measures your lifetime monthly payments. Factors like how much you've paid and how long you've worked for an employer are relevant to consider.
The payout in this sort of plan depends on the amount of money you have contributed and the type of investments the program is invested in, and their performance over the years. As a retired person, you may be able to select to be paid in the form of an annuity that pays you a specific amount of money regularly until your death. Grants that deliver benefits to your spouse or ex-spouse are also available in many plans like this. The payment will be higher for every month's single payment plan because the money does not have to be stretched (potentially) past the date you pass away.
Dividing retirement plans in a divorce
From my experience as a family law attorney, it can be among the more tedious aspects of a divorce to divide retirement plans between two soon-to-be-divorced spouses. First of all, the accounts need to be valued. This may be easy enough for a defined contribution plan, but for defined benefits plans, you will need to contact the plan administrator to get a statement of the value since it cannot be measured in pure dollars and cents. Remember that the community property rules apply here, and contributions made before your marriage must be calculated. A determination will then need to be made to figure out how the account will be divided between you and your spouse, if at all.
A word on how your retirement account will be valued in a divorce
As I just stated, a defined contribution plan is a lot easier to place a value on than a defined benefit plan. It makes life much easier for the attorneys to split a defined contribution plan between spouses. You can log onto your administration website, pull the value on an agreed-upon date and submit that to your attorney. That sum will be shared with the opposing attorney before mediation or trial. The retirement account can then be split either on a dollar or a percentage basis. One factor that still must be paid attention to is the change in valuation between the date the account is divided and the date the money is distributed to the correct party.
Defined benefit plans are not as simple a matter, unfortunately. Taking the formula we utilized earlier in this blog post, we understand that the value of a defined benefit plan is primarily based on future value and a future stream of income that will be paid from the program to you upon retirement. Your defined benefit plan may not be possible to pay you a lump sum of money upon request. The benefit can only be delivered to your spouse starting about when they are expected to retire, and the plan dies along with your spouse and cannot be passed down through a will or the laws of intestacy.
Your age plays a significant role in the future value of a defined benefit plan. For instance, if you are a younger spouse and your former spouse beings to draw from the program earlier than t "e "nor "al" retirement age, then your monthly sum of benefits will be discounted proportionately with the sum taken out before by your ex-spouse. Suppose you find yourself in a position where you have to rely upon a future value of an account. In that case, you may want to consider asking for another piece of property or asset instead of being awarded a stake in your spouse's pension plan.
Hire an expert to value the defined benefit plan?
You and your attorney should discuss the possibility of whether or not to hire an expert witness to value the defined benefit plan to make sure that you are receiving an asset that is equal to the value of the pension plan or as close to equal as you can get. This is not an exact science, even for an expert, and you should not necessarily enter into the process with that sort of expectation.
Questions on how your retirement account will be divided in a divorce? Retomorrow'sw's blog post to find out.
Now that we have introduced the subject of retirement plans and divorce enough to get you interested, we will statomorrow'sw's blog post discussing how the accounts are divided. Think of this process less as cake cutting and more as a math equation. Meaning: it does not have to be as cut and dry (no pun intended) as taking one entity and dividing it up. Instead of dividing a retirement plan, you can consider other assets and property in play if you do not want to deal with the issues associated with receiving a future stake in a retirement plan. We will go over this and other related topics tomorrow.
Questions about retirement and divorce? Contact the Law Office of Bryan Fagan, PLLC
Did you know that divorce among people nearing retirement age is on the rise in the United States? Whether you are just starting in the working world or are close to retirement, you should know how a divorce could affect your post-work finances. The law office of Bryan Fagan, PLLC, strives to provide you with information to help you make better, more informed decisions to benefit you and your family.
If you have any questions about the material you read today, please consider contacting our office. We would be happy to meet with you in a free-of-charge consultation with one of our licensed family law attorneys.