401k retirement

Dividing the Retirement Nest Egg in Divorce, Part 2

In an Arizona divorce settlement, you can expect to see retirement benefits considered as community property, unless you had the foresight to sign a prenuptial agreement. As mentioned in our previous post on the division of retirement benefits in divorce, those benefits will need to be divided equally when the marriage is dissolved.

We left off at division of a Defined Benefit Plan and determining the value via engagement of an actuary. You may wonder if it’s wise to use the present value method. And the not-so-short answer is that you’ll need to weigh the certainty of obtaining a fixed present value and being free of any future entanglement related to the plan against the risk that the employee (aka your spouse) may not live to retirement age. Or even whether those benefits will still exist at retirement.

Keep in mind that you will need to be prepared to pay taxes once you receive your designated retirement benefits from a Defined Benefit Plan or when you withdraw your benefits from a Defined Contribution Plan. The rare taxpayer “freebie” occurs when you withdraw part or all of your share of the Defined Contribution Plan – you’ll be taxed but not penalized. You cannot, however, cash out your share of a Defined Benefit Plan upon divorce.

Death & Designated Beneficiaries

Death of a former spouse affects benefits.  But the impact may not be a complete loss of benefits if there’s a QDRO in place (for a Defined Contribution Plan) or if you’ve been awarded survivor benefits under the divorce decree (for a Defined Benefit Plan).

What happens if you die before you begin receiving benefits under your former spouse’s plan? Most plans give the receiving spouse the right to designate a beneficiary. So that should be covered. But, double-check. Some defined Benefit Plans require that the benefit revert back to the employee spouse, which is the case with the Arizona State Retirement System.

There are instances where a former spouse can remarry and designate a new spouse as beneficiary, even though the divorce decree directed them to name you. Did you have a QDRO? If so, then you’re probably ok. If not, then ERISA, as a federal statute, trumps an Arizona divorce decree, and you’re probably out of luck.

The moral of the retirement benefits division story? Protect those nest eggs now so you have chickens to count later!

The McCarthy Law Firm recommends you consult with a family law attorney and qualified financial or tax advisors when it comes to your specific retirement issues.

This article is inspired and sourced from Kathleen McCarthy’s 2013 Brief Encounters article, as published in Tucson’s Desert Leaf magazine.

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