Ever wonder why your attorney asks so many questions about your retirement account? It’s not because we secretly envy you for one day having the ability to retire (okay, on a tough day of trial, some of us do). It’s not because we want to find the largest account to liquidate to pay our fees (though some of the shady ones might). It’s not even because we know about and can advise you on all of the nuances of your retirement account (retirement is a specialized area of divorce law, and those who do not deal with it daily probably cannot).
It’s because there are many things hidden in your retirement account that, if not searched for, are likely to go unnoticed – to your detriment, or, if you play your cards right, to your ex’s. Take these five as examples:
1. IT’S MARITAL PROPERTY – SO GET OVER IT
If you think your retirement account is yours because you (and possibly your employer) contributed to it with your hard earned money from years of work, well, you’re wrong. In most states, it makes no difference whether the money is yours, your spouse’s or your employer’s. So long as the vested value of the account accrued between the date of your marriage and the date of your separation or your divorce, that money is at least one-half your spouse’s, too. This means all of the dollars you and your employer put in, plus any appreciate in pre-marriage dollars from your active investments, are your spouse’s, too. Some clients are shocked to find this out, believing, naively, that they worked so that they could one day retire and, therefore, should be able to keep the money they earned to retire. The theory in most states, however, is that he or she worked so that the married coupld could retire, so they should share in that money.
This is a bitter admonition for a client whose spouse has filed for divorce, particularly if that spouse does not have a retirement account of his or her own and child support and alimony and half of all of the property (but not the debt!), too. However, the sooner you accept it, the sooner you can prepare to negotiate the things in your divorce that are worth negotiating. If the law in your state says your spouse is entitled to half, then you do yourself a huge disservice (and probably pay your attorney a lot of money) to argue otherwise, absent a really, really good reason. And those are tough to come by.
That being said, if your spouse has a retirement account, no matter how small, don’t be afraid to ask for your share. If nothing else, you can offset it against her large share of yours.
2. ANCILLARY AND COMPONENT BENEFITS
When most clients think about their retirement payout, they envision a set dollar figure that they will receive every month when they retire. This is true, usually, but there are a lot of things that make up that dollar figure. Most clients know about the basic benefit – the “set” figure they anticipate receiving. In addition to that basic benefit, your retirement plan may also offer adjustments for the cost of living, survivor benefits, early retirement supplements and subsidies, a lump sum “buy out” amount, and a host of other adjustments to your basic benefit and payments in addition to your basic benefit. We call these the ancillary and component benefits, or “the bells and whistles.” In most states, these too are marital property to be divided between you and your ex.
Interestingly, while the basic benefit division law is clear (see point 1, and get over it), the law applicable to ancillary and component benefits is not. Here, then, is your first opportunity for negotiating. Always consult an attorney for the laws applicable in your case, but you are likely to find that these benefits are not automatically half each spouse’s or, if they are, only when specifically stated. For example, in some states, an ex-spouse is not entitled to a share of survivor benefits (the benefits paid to your named survivors when you pass away) unless your ex’s entitlement is specifically stated in the divorce decree. The same may apply to early retirement benefits. So, a clause stating your ex is entitled to “one-half of retirement account X” may exclude the “bells and whistles” when you actually retire years later. The result is a larger payout to you because your plan does not have to set aside money for your ex.
3. TAX EFFECTING
A bank account and a retirement account may have the same balance, but that does not mean they have the same value. In the pursuit of a quick settlement with liquid assets, and hoping to avoid an expert’s fees, some clients will swap a bank account for a retirement account. The problem is, $50,000 in the bank now is not the same as $50,000 in a retirement account now. For one thing, to the extent you can access the retirement account, usually you must pay penalties and taxes for making a withdrawal. For another, there may be hidden costs, such as a loan in repay-status, tied to that account. On the other hand, a future stream of income is usually more value, the present day value, than cash.
It’s worth a meeting with a CPA or other specialist to have those accounts valued. At a minimum, you need to know how much a retirement account you or your spouse intend to liquidate is worth after paying taxes and penalties. (You should also figure out who will be hit with the tax bill and account for that in your divorce settlement). This is called “tax effecting,” meaning that we figure out how much the spouse will have to work with after paying taxes. It’s this figure, not the raw account balance, that we compare to the bank account.
4. LOANS
So you took out a loan to pay credit card bills, to repair the roof or for a vacation, etc.? Then you’re like most clients. The bad news is (yes, it gets worse), for most retirement accounts loans are not dividable – which means you are left paying back the entire loan after your divorce. The good news is (yes, there’s good news), the loan is also a marital debt that should be divided between the two of you.
Even though you cannot physically divide it in your account, you can account for it by dividing the account net of the loan. Read your settlement or divorce decree carefully to make sure that language is there – otherwise, the plan rules may default to you paying the loan and sharing in the account as if the loan had never been taken. Do not sign either until the language is there. This is language to negotiate before you settle or to request specifically at your trial. Even if the plan does not have such a default rule, it does not hurt to specify your and your ex’s intent to account for the loan – why leave wiggle room for a different result, i.e. more money for your ex, later?
5. NEW SPOUSES
In the upheaval of divorce, another marriage may be the last thing on your mind. But there may come a time when a new flame in your life becomes your spouse, and one day the two of you really do retire as a married couple. Do you want your ex meddling in your affairs when that happens? Your ex could, unless you protect your future retirement (with your future spouse) now. Again, always consult with an attorney and review your plan specifics, and make sure you ask: Is the account division as of the date of separation or divorce, or is it “the entire account” (which is a bad idea, because you basically divide all of the money you earn after your divorce)? If your ex is named as a survivor, can you name additional survivors, or does your ex receive the entire survivor benefit (leaving your new spouse empty handed)? If your ex passes away, does your ex leave any outstanding benefits, and do those revert to you (to pass on to your new spouse)?
What you do not want to happen, but what often does happen, is to retire only to find out that your retirement money does not match your expectations. So, have this conversation with your attorney early in your case and often – we really do care about your retirement, and for at least these five reasons.