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 am going to 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 that is the type 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.
Depending on if 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 as to how much you can pay into each of these accounts on a yearly basis.
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 account while the growth 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 and operates different than those retirement accounts that we detailed in the sections prior to this one. 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 that you have contributed as well as the type of investments the plan is invested in and their performance over a period of years. As a retired person you may be able to select to be paid in the form of an annuity which pays you specific amount of money on a regular basis until your death. Annuities that pay benefits to your spouse or ex-spouse are also available in many plans like this. The payment on a monthly basis will be higher for the single payment plan because the money does not have to be stretched (potentially) past the date that 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. Keep in mind that the rules of community property apply here and contributions that were made prior to your marriage must be calculated. A determination will then need to be made in order 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 as far as splitting 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 prior to mediation or trial. The retirement account can then be split either on a dollar basis or percentage basis. One factor that still must be paid attention to is the change in valuation between the date that the account is divided and the date that the money is distributed from the account 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 largely based on future value and a future stream of income that will be paid from the plan to you upon retirement. It may not be possible for your defined benefit plan to pay you a lump sum of money upon request. The benefit can only be paid to your spouse starting about the time that he or she is 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 major role in the future value of a defined benefit plan as well. For instance, if you are a younger spouse and your former spouse beings to draw from the plan earlier than “normal” retirement age then your monthly sum of benefits will be discounted proportionately with the sum that is taken out early by your ex-spouse. If you find yourself in a position where you are having to rely upon a future value of an account then you may want to consider asking for another piece of property or asset in lieu of being awarded a stake in your ex-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 in order 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? Read tomorrow’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 start tomorrow’s blog post with a discussion of how the accounts are actually divided. Think of this process less as a 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. In lieu of dividing a retirement plan you can consider other assets and property to be in play if you are not wanting to deal with the aforementioned 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 out in the working world or are close to retirement, you should be aware of how a divorce could affect your post-work finances. TheLaw Office of Bryan Fagan, PLLC strives to provide you with information that can help you make better, more informed decisions to benefit you and your family.
If you have any questions about the material that 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.