Dividing property is an aspect of most divorces, especially for marriages of several years’ duration. Among the most substantial assets that spouses accumulate are retirement savings, such as pension benefits, individual retirement accounts (IRA), 401(k)s and deferred employee compensation packages. These benefits, to the extent they are earned during the marriage, are subject to being divided between the spouses in a divorce. There are special rules and requirements that apply.
Michigan follows the rule of equitable distribution in divorce, which means that the family courts divide marital property between the spouses in a fair and equitable manner. Not all property owned by either spouse is marital property. Some assets are considered separate, meaning that the property owner’s spouse has no claim to a share of it in a divorce. In most cases, separate property comprises assets accumulated prior to the marriage or received through gift or inheritance. Family court judges have broad discretion regarding what they consider fair and equitable. An experienced family law attorney can provide appropriate guidance.
In some instances, a retirement account may be deemed partially marital and partially separate, depending on when contributions to it are made and when net gains or interest are earned. Any portion of the retirement assets that accrue during the marriage are subject to equitable distribution. This can be done voluntarily or it can be part of a court order splitting all of the couple’s marital property.
Taxes are a major issue with respect to dividing retirement accounts, since division requires withdrawal of funds. Retirement funds like 401(k)s get favorable tax treatment that allows withdrawals at a lower cost once the account holder reaches a certain age. However, when the funds are withdrawn early, there are usually significant tax costs and penalties. The law provides ways for retirement funds to be distributed during divorce without such costs to either spouse. Division of 401(k) funds and other ERISA-covered accounts is done using a “qualified domestic relations order” (QDRO), which authorizes a withdrawal and reinvestment of funds without incurring taxes or penalties. IRAs are divided tax-free by way of a “transfer incident to divorce” order (TID). QDROs and TIDs must be issued regardless of whether the division of the account is mandated by the court or negotiated by the spouses.
Divorcing spouses must also consider the death beneficiaries designated for certain retirement accounts. Some assets cannot be transferred until the owner’s death. Funds are then distributed to the named beneficiary. A spouse transferring or receiving funds by way of a QDRO or TID should select an account beneficiary in case of his or her death. Divorcing spouses often want children of the marriage to inherit the assets. If the children are minors, a trustee may need to be appointed.
Dawson Family Law, PLLC in Sterling Heights, Michigan practices domestic relations law throughout the greater Detroit metropolitan area. If you are divorcing, contact us online or call 833-671-4445 for a free initial consultation.