Working in the tech field, specifically for one of the more established companies, has likely been a rewarding experience for you and your spouse. However, the responsibility of dividing up the retirement benefits that you have been able to earn in your time working for the company can end up being a challenge for even the most well-organized, diligent, and intelligent among us. You need to understand what sort of retirement plans are available to you, what the details are of each, and how to divide your funds (if necessary) in your divorce.
For both the tech company employee- spouse and the non-employee who needs to be able to access funds to retire at a reasonable age, today's blog post from the Law Office of Bryan Fagan is for you. We are going to discuss what it means to divide up a retirement plan in your divorce and how some different ideas about retirement plan division may impact you and your spouse. If you have any questions about the material that you have read in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan for a free-of-charge consultation with one of our experienced family law attorneys.
What sort of retirement plan benefits may you have available to you?
In many tech companies, there are two basic retirement plan options for you to choose from. The first is a 401K as you would see in many companies being offered in the US these days. The other is an employee stock purchase plan which would allow you to purchase stock from your company, often at a discount compared to the public. Given the trajectory of tech stocks over the years this may have proven to be a great financial decision for you and your family to embark upon.
A 401K is a defined contribution plan. This means that you will determine how much (if any) of your paycheck will go into the 401K, typically capped at around 75-80% of your compensation each pay period. After working at your company for six months, nine months, or sometimes one year, your company will frequently match you dollar for dollar in terms of your investments. There is usually a cap at around 5% of your salary as far as what the company is willing to invest into your 401K along with you. This is a great outcome for employees such as yourself. Even during periods when the stock market is not quite performing to its historical averages, the guaranteed contributions from your employer can make these investments prove to be worthwhile for you.
Roth 401Ks are also a great retirement vehicle if your company offers one to its employees. These are tax-free investments that see your investments grow after taxes have already been paid. Employer matches still apply with the Roth plan and you can see tremendous growth given that all your gains are not taxed. Roth IRAs are limited to people who earn less than a certain number in income each year. Roth 401Ks do not have an income limit and are therefore open to all investors.
What makes an IRA with many tech companies so great for employees like yourself is that you are given several options as far as investment funds in which to deposit your money. There are a series of aggressive growth, growth and income, growth, international, bond, and other types of funds which may catch your attention and your dollars. You can judge the performance of each based on their track record over time. Seeking out the advice of a financial advisor is a good idea to consider, as well, when it comes to investing.
An employee stock purchase option allows you to put your money where your mouth is and invest in your company. As I mentioned earlier there is usually a discount offered to employees of a company when it comes to investing in the company stock. However, be aware that the discount may also be available to the public but in a roundabout way. Consider that if you are given a five percent discount on purchasing the stock the public can “buy the dip” and purchase the stock at a similarly reduced price at various points in a year, as well. Again, this is something to discuss with your employer investment advisor or an independent investment advisor.
Division of a 401K in a divorce
A 401K is divided through a qualified domestic relations order (QDRO). A QDRO is the only way to divide a 401K. A QDRO is a means by which you can tell your employer that your rights to a retirement plan or a portion of that retirement plan are being assigned to your spouse in a divorce. The key to this entire discussion is that your investment will be divided in the divorce however you all agree with no tax penalties. Early withdrawals from a 401K are generally taxed and then a penalty of 10% is assessed. However, if you divide up your 401K and then immediately deposit those funds into another retirement account there will not be a penalty assessed. This is what the QDRO helps you to accomplish.
A QDRO is signed by a judge and then sent to your plan administrator through your employer. He or she will then divide up the retirement plan in whichever way the QDRO instructs him or her to do. An attorney is the best person to draft a QDRO. If you are representing yourself in a divorce, it is a good idea to at least consider having an attorney draft a QDRO on your behalf. Your spouse if he or she will be receiving money from your retirement. Is usually the party to draft the QDRO and pays the expenses of having the order signed by a judge. You can hire an attorney to review the QDRO once sent to you before the judge can sign it. A QDRO is typically signed after a divorce or along with the final divorce paperwork. The divorce can be finalized before a QDRO is drafted, however. It is almost a completely independent document and signing process.
In some instances, your spouse may be interested in receiving another asset from your community estate instead of receiving retirement. This is because there is an increased amount of attorney's fees and time associated with dividing a retirement account. You need to get the steps correct when you try to access retirement income via a QDRO. Retirement plan administrators have specific language that must be included in the QDRO and if a mistake is made or language is left out that can create a situation where you suffer delays and increased attorney’s fees as a result.
You and your spouse would need to evaluate your community estate to determine whether there are sufficient assets available to substitute for retirement savings. For example, let's say that your spouse has asked for $250,000 of your retirement funds as a part of your divorce. This was a settlement offer made to you at the beginning of the face. You have acknowledged that this amount is appropriate but after negotiating on the details of accessing those funds it became apparent that your spouse needs cash now more than she needs those retirement funds. You two are relatively young and she has a career and retirement funds of her own. As a result, accessing cash now means more to her than accessing retirement funds in thirty years. She and you instead worked out a plan for her to get all of your brokerage funds, the value of which is around $250,000, in the divorce instead.
If you do need to learn how to submit a QDRO and include the specific language that a retirement plan needs to release funds to you or your spouse, you can go to the brokerage firm or investment house that services their investments. Most of these companies have specific websites dedicated to QDRO issues. You and your attorney can have a QDRO representative walk through the process with you that are specific to the plan that you are trying to tap into. In some cases, you can even have the representative create a QDRO for you with the language specific to your case. Once you have a draft QDRO prepared you can have that document reviewed by your attorney and have changes made where necessary.
What information do you need to include in a QDRO?
The QDRO is a very specific document that must include certain pieces of information before it can be accepted by the plan administrator. Keep in mind that rushing through the document to say that it is done is not a good idea. Your attorney should take the time necessary to reach out to the retirement plan so that he or she knows exactly what to include in the document rather than submitting an incomplete or imperfect document. The last thing you all want to do is put yourselves in a position where the divorce has been finalized, and the judge has signed a QDRO, but the QDRO is not acceptable to the court.
The name of the plan is something basic but necessary for a QDRO. Some of these companies or financial plans have very similar names so you and your attorney should make sure that you are calling the plan by the right name. You can pull a copy of your retirement plan prospectus or year in review to get the exact name of the plan. Or simply call the plan administrator and ask them for this information. Some of the larger tech companies may even have retirement plan templates available online for you to be able to look at and review to get the correct name of the retirement plan.
Most of the other information is fairly "painted by numbers" as far as pulling the information from your final decree of divorce. The name and mailing address of whichever one of you is the plan participant is needed. You may need to update this information with your company and the retirement plan if you are the spouse who has moved out of the house before your divorce begins. Both spouses will need to turn in their addresses to the court and this is useful because you can pull the information from there and insert it into the QDRO when you are drafting the document.
The amount of money that needs to be pulled out of the QDRO must be included. Importantly, you should make sure that the amount listed in the QDRO matches up with the amount listed in the final decree of divorce. Finally, the specific payment needs to be included in the QDRO. How many payments, how often the payments are to be made and any other details should be spelled out word for word how the company needs them to be. You should have checked first with the plan administrator to figure out how payments can be made and if there are limitations on the frequency or number of payments. As many retirement accounts as you and your spouse have, you will need to have a separate QDRO for each if money will be coming out of each account.
Final steps of sending in the QDRO
A completed QDRO means that you would have drafted the document according to the terms of the plan and have verified with the plan administrator that the QDRO conforms to their requirements. Then, you should submit the QDRO to the judge for their signature. This may mean that you need to file a motion to enter the QDRO if you are only asking the judge to sign the document. Or you may submit the QDRO along with your final decree of divorce if you have the document ready in time. It is more cost-effective to have the QDRO ready to submit with the rest of your documents, such as a wage withholding order for child support.
Once the QDRO has been signed by the judge you will need to send a copy to the plan administrator. You can follow up a few days after mailing the QDRO to ensure that it has been received. The QDRO will be reviewed to make sure that it complies with the requirements necessary to divide up a retirement plan. Amended QDROs may need to be drafted- you cannot make changes to the existing QDRO and resubmit. This will entail sending the QDRO back to the court for their signature. You can mail the QDRO again and hopefully this time the document will be accepted by the plan administrator.
Once the plan administrator has received a QDRO which complies with their requirements, the spouse who is going to be receiving money will be notified about how their money is going to be sent to them. A direct transfer into another qualified retirement plan will be for the best. What you do not want to see happen is for money to be sent to you or your spouse in the form of a check. Even if you can immediately deposit that money into another retirement account that means you may be erroneously dinged for tax purposes by the IRS for having done so. Even if you are in the right you may have to go through some stress to have the IRS correct its mistake. It is best to contact the plan administrator if you have been sent a check or received money directly to your home or even a bank account of yours.
Retirement plan division is part of the more general process of dividing community property. This is a topic that demands its blog post and, indeed, the Law Office of Bryan Fagan has written several times on how to divide community property in a Texas divorce. What you need to figure out is how can you and your spouse best divide up your marital property considering the specific circumstances of your case. Your circumstances will set your case apart from any other divorce. How you negotiate your case will cause a ripple effect that can and will impact your life now and in the future.
The attorneys with the Law Office of Bryan Fagan understand that your case and your life are unique. We treat all our clients with respect for them as individuals and their circumstances as demanding individualized attention. If you need help with a divorce and want a group of attorneys by your side who are diligent, prepared, and professional then look no further than our office.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as how your family's circumstances may be impacted by the filing of a divorce or child custody case.
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