Many families hold a substantial portion of their wealth in retirement plans. When couples divorce, the money each has set aside for retirement is subject to division.
Dividing pension and retirement benefits in a Southbury divorce requires specialized knowledge and skill. Work with our experienced property division attorneys to ensure retirement benefits are divided fairly in your divorce and do not trigger any unforeseen tax consequences.
Private pension plans are governed by the Employee Retirement Income Security Act (ERISA), which prevents anyone but the owner from accessing an individual’s pension.
There is an exception in the law that allows the division of pension benefits when married couples divorce. The couple can execute a Qualified Domestic Relations Order (QDRO), which instructs the pension or 401 (k) plan administrator to transfer a portion of the funds to the owner’s former spouse.
The transfer is usually a tax-neutral event. However, the spouse will pay income tax on the money they withdraw. A Southbury attorney can draft a QDRO and ensure that a spouse understands the tax implications of dividing these assets.
Pensions for people who work for the State of Connecticut or a municipality within the state are not governed by ERISA. However, they are afforded some of the same protections under state law. Connecticut General Statutes § 5-171 prohibits pension members of beneficiaries from assigning their interest in their retirement benefits to others.
These benefits are also divisible in a divorce. A judge must issue a Qualified Domestic Relations Order (QDRO) directing the plan administrator to transfer a portion of the benefits to the non-owner spouse.
Traditional individual retirement accounts (IRAs) are funded with pre-tax dollars. Tax is deferred until the owner withdraws funds from the account. There is a 10 percent penalty for early withdrawal, and withdrawals after age 59 1/2 are taxed as regular income.
Many people supplement their employer-sponsored retirement benefits with IRAs. These accounts are considered marital property and must be divided fairly when a couple divorces. Transferring funds from IRAs between spouses is tax neutral as long as the receiving spouse rolls the money into another IRA. Otherwise, they will be subject to the 10% penalty if they have not reached 59 1/2 and are taxed on the withdrawal.
Roth IRAs are funded with after-tax dollars but grow tax-free. Withdrawals after age 59 1/2 are not taxed as long as the account has been open for at least five years. A Southbury lawyer can assist spouses in considering whether there will be any tax consequences in dividing a Roth IRA.
Business owners and high-level executives often have complex compensation packages that include deferred compensation, grants of stock, and other benefits designed to minimize income taxes and ensure a comfortable retirement. These future benefits earned during the marriage are divisible in a divorce.
Determining the value of these benefits can be challenging and usually requires professional assistance. A Southbury asset division attorney has a network of financial professionals who can examine a compensation package and provide a valuation.
Transferring the assets can also be complicated when the value has been established, and a spouse’s fair share is determined. In many cases, it is most beneficial for the owner to retain the asset and pay the spouse their portion in cash or other assets.
Spouses have the right to share in each other’s retirement funds. Depending on the vehicles the couple uses to hold their retirement savings, dividing can get complicated.
Consult one of our experienced family law attorneys when dividing pension and retirement benefits in a Southbury divorce. Contact us today, and we will schedule an appointment to discuss your asset distribution issues.
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