Handling Retirement Benefits in Divorce Settlements

Did you know that, under Arizona law, unless you have a prenuptial agreement, all retirement benefits acquired after marriage are community property? That means they must be divided equally when the marriage is dissolved. Sounds straightforward enough, right?

Avoid wasting your precious retirement dollars. Here’s the high level-view of how Arizona family law applies to retirement benefits.

You have a pre-marital retirement fund that’s mixed in (commingled) with post-marital contributions. The good news is that the pre-marital portion, plus the growth (or loss) remains your separate property.

Retirement benefits come in all shapes, sizes and flavors. IRAs and Defined Contribution Plans (401(k), Profit Sharing, Thrift Savings, 401(As) and more), can be divided immediately upon divorce. However, Defined Benefit Plans pay a benefit in the future.

Now here, things get a bit more complex: the Qualified Domestic Relations Order (QDRO).

All “qualified” plans (per the Internal Revenue Code’s definition) are subject to a federal statute called the Employee Retirement Income Security Act (ERISA). Typically, qualified plans aren’t vulnerable to creditors, but thanks to ERISA, there’s an exception in divorce, as long as a QDRO is signed by the court.

If a QDRO is not signed before the employee spouse dies, the receiving spouse may lose their share. If a QDRO is signed, the plan is required to pay the benefit directly to the receiving spouse: Here’s how things play out:

  • With a Defined Contribution Plan, a QDRO allows for an immediate transfer of benefits to the non-employee spouse.
  • With a Defined Benefit Plan, the receiving party is entitled to 50% of the marital benefit, payable upon the employee spouse’s normal retirement date.

IRAs, however, are not controlled by ERISA, so you don’t need a QDRO to divide retirement funds from your IRA. Instead, your divorce decree should spell out the IRA division details.

Non-qualified pension plan benefits can be a little trickier. While you’re entitled to benefits from it, and the court divides the benefit, the plan does not have to pay you directly. You are at the mercy of your former spouse to pay you. Don’t despair, though. Work with your attorney to determine enforcement mechanisms that can help in this instance. Perhaps your share is called “spousal maintenance” or there’s a way to secure your benefit with other assets, like an award of other marital assets.

If you’re keen to avoid future issues, you can pay your former spouse their interest in your Defined Benefit Plan. There just needs to be assets available that can pay the present value of the recipient spouse’s share. It will also need to be “equitable.” The court can order this type of disbursement. You’ll need an actuary to perform the calculation, which is influenced by life expectancy, inflation forecasts, tax effect and so forth.

For more on splitting retirement benefits as part of your divorce, read Part 2.

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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