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Retirement Account Distribution in Divorce

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 his or her death.  The distribution of a retirement account will differ depending on the type of retirement account that a spouse may possess.

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 forego their portion of the monthly pension benefit in exchange for receiving a lump sum distribution from another marital account instead.  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 sun, and they can choose to either keep those funds in their own retirement account (like a 401K) or to withdraw those funds (and face possible tax consequences).

If you are interested in learning more about retirement account distribution in divorce, contact Tanner Law Offices at (717) 731-8114 to schedule a consultation with one of our attorneys.