Retirement Plans and QDROs
During a divorce, almost all of a couple’s assets will be subject to division, assuming that the couple did not previously have a premarital agreement in place. One of the more complicated assets that must be divided is a retirement account. Since retirement accounts are often subject to taxation or penalties if stocks are sold, transferred, or withdrawn, a spouse seeking to receive a portion of the other spouse’s retirement accounts must be careful to follow precise procedures for doing so. At Reddin & Singer, our Milwaukee divorce lawyer is here to guide people in Wisconsin through this complex process.
Retirement Accounts and Divorce in WisconsinWisconsin is a community property state, which means that assets that are brought into the marriage by the two spouses or acquired by the spouses during the marriage are considered to be jointly held. These include retirement accounts that may accrue during a course of a marriage. Retirement accounts include tax-advantaged accounts, such as 401ks and IRAs, as well as pensions that an employee may be set to receive upon retirement through a public employer or private company.
Since retirement assets are complicated to value and divide (often because they cannot be accessed until after retirement), there are two ways that spouses can deal with retirement accounts in a divorce. First, they can undertake the steps necessary to divide the account, which are discussed in more detail below. Second, one spouse can keep the retirement assets in their entirety but offset the amount by providing an equivalent amount of non-retirement assets to the other spouse. While an offset does take into consideration the tax benefits of a retirement account, and it requires the parties to compensate for those tax benefits, it does not need to take into consideration the future growth of retirement benefits. This can make an offset a less desirable choice for spouses who are getting close to retirement and do not want to start over from scratch to obtain retirement benefits.
The Division of Retirement AssetsAs mentioned above, typically the transfer or withdrawal of retirement assets prior to retirement is an event that can subject you to tax penalties. However, divorce is considered to be an exception to this rule, and divorcing spouses may take advantage of a one-time opportunity to divide their retirement benefits without taxation.
This is typically done through a qualified domestic relations order (QDRO), which is an official order from the court that can be provided to the company or companies holding retirement assets to allow those assets to be divided and transferred to another individual.
In order for a QDRO to exempt parties from the tax consequences of a retirement asset transfer, the QDRO process must be initiated as soon as possible after a divorce so that the transfer is considered to be “incident to divorce.” This means that even if your ex-spouse has a pension that will not begin to pay out for another 20 years, for example, your attorney will still need to help you acquire a QDRO and provide it to the pension fund in a timely manner, rather than waiting until the benefits are available.
The timely transfer of divorce assets is also important to make sure that you receive the full value of what you are entitled to receive. While your spouse’s retirement assets may be valued at a certain amount at the time of divorce, this can change over time as the market takes a loss or your ex-spouse is required to take yearly distributions. In order to preserve your right to the full value of your share, it is important to completely divide retirement assets soon after they are valued in a divorce.
It is also important to note that while retirement assets can be divided and transferred without tax penalties after a divorce, the normal penalties that apply to early withdrawals of retirement assets will still apply after the assets are transferred. Thus, for example, if you intend to rely on the retirement assets that you are going to receive in a divorce to pay your mortgage or supplement your income, and you are not yet at retirement age, you will need to pay tax penalties on those withdrawals after the funds are transferred.
Contact a Knowledgeable Divorce Lawyer in the Milwaukee AreaWhile retirement assets are an important part of any high-asset divorce, they do come with challenges. Spouses must carefully consider their financial situation, pending retirement, or interest in long-term financial holdings when deciding whether to divide or offset retirement assets. At Reddin & Singer, LLP, Milwaukee attorney Terese J. Singer can help you consider which option works best for you in the overall picture of the assets to be received in a divorce. Contact our office for more information at (414) 271-6400 or online. We represent residents of Milwaukee, Mequon, Racine, West Bend, Waukesha, and other communities in Racine, Washington, Milwaukee, Ozaukee, and Waukesha Counties.