Jan L. Warner & Jan Collins
Question: After nearly 30 years of marriage and educating two of our three children, I was shocked to find out in our divorce proceeding how little we had accumulated. The biggest asset is my husband's retirement. Although my lawyer has tried to explain to me what's what with retirement, I still don't understand. Could you illuminate me about this complicated topic?
Answer: In many long marriages, the working spouse's retirement fund may well be the most valuable family asset. Because there are many kinds of retirement plans, each situation is different and requires expert advice. At the risk of oversimplification, but speaking very generally, retirement funds can be marital property to the extent they are vested. "Vested" means different things depending on the type of retirement plan you are talking about:
ALL CONTRIBUTIONS COME FROM THE EMPLOYEE: If this is the case and your husband's employer has put in nothing, then the money in the retirement plan is vested 100%. This means that if your husband leaves the company voluntarily or is fired, he can take with him all the money he put into the plan plus the earnings.
ALL CONTRIBUTIONS COME FROM THE EMPLOYER: At the other end of the spectrum, if all of the money in the retirement fund came from your husband's employer, then the percentage of the plan that is vested depends on a schedule set by the company. Each company sets up its own rules and regulations as long as they comply with a federal law called ERISA.
BOTH EMPLOYEE AND EMPLOYER MAKE CONTRIBUTIONS: If, for example, the employer matches the employee contributions in some fashion, and then the employee leaves, he can take the total amount he put in and a portion of what the employer put in, depending on the company vesting schedule.
Many employer plans are "defined contribution" plans and have a lump sum that can be valued so that, if retirement is several years in the future, the wife may prefer to take a lump sum now instead of waiting for retirement. So long as the lump sum stays in a qualified plan--i.e., is "rolled over" into an IRA--that portion of the retirement plan can be changed to the wife's name and there is no penalty and no tax.
If, however, the wife needs to use the retirement money to live on and cashes in part of it to meet her obligations before she reaches age 59 1/2, she will pay both taxes and a 10% penalty. There is one instance, however, when she can take out money before age 59 1/2 without being penalized, but she will have to pay the taxes on what she takes out. Divorce is one of the only ways she can avoid 10% penalty.
Sometimes, a retirement plan may be vested but not mature. This means that although the husband may have worked long enough to be totally vested, he may not receive any part until he reaches retirement age. If this is the case and he dies before retirement age, neither he nor his beneficiaries will get the benefits.
The husband and wife can agree how the retirement is to be divided, or the court will order it based on the evidence. In order to allow the wife to get her percentage of the retirement under federal law, there must be a Qualified Domestic Relations Order, a QDRO. In some instances, however, QDRO's are not applicable.
A word to the wise: There are many complex tax and other questions involved in the retirement area, so read up on the type of plan with which your are faced, understand your options before you make your decisions, and always consult with an expert in the field before you act.