There are two basic types of retirement accounts: defined benefit plans and defined contribution plans. A defined benefit plan, such as a pension, provides a specified monthly sum in retirement until the participant’s death. A defined contribution plan, such as a 401K, provides a specified monthly contribution amount that is paid from the participant’s pay each pay period to the plan, but does not guarantee a particular payout at the time of retirement. There is also no guarantee with a defined contribution plan that there will be sufficient funds to pay the participant until their death. The distribution of a retirement account will differ depending on the type of retirement account that a spouse may possess.
How Retirement Accounts Are Divided During Divorce in Pennsylvania
If a spouse has a defined benefit plan, like a pension, the other spouse may be entitled to receive a portion of that spouse’s monthly retirement benefit as part of the distribution of the marital assets. In some instances, the other spouse may choose to forgo their portion of the monthly pension benefit in exchange for receiving a lump sum distribution from another marital account. In such instances, it is helpful to have the pension valued by an expert; unlike a 401K, there is not a “pot” of money sitting in an account that one can withdraw from, but instead a complicated formula is involved in estimating the eventual monthly benefit and the current value of that benefit.
If a spouse has a defined contribution account, on the other hand, it often makes sense for the parties to split that account via a Qualified Domestic Relations Order (“QDRO”). A QDRO enables the receiving party to have a portion of the retirement funds transferred to them as a lump sum, and they can choose to either keep those funds in their own retirement account (such as a 401 (k)) or withdraw them (and face possible tax consequences).
If you are interested in learning more about retirement account distribution in the context of divorce, call (717) 731-8114 or contact us online to schedule a consultation with one of our attorneys.