Divorce by its nature focuses on the present and near future, with an emphasis on both parties being treated equitably and being able to live reasonably. Since marriage is a financial foundation for most people, some care should be given to the further future, especially retirement.
In general, the assets accumulated by the couple during marriage are community property. This includes retirement assets. While most assets can be divided at the time of divorce, employer-sponsored retirement assets cannot. There simply is no mechanism to divide the balance between two accounts.
A legal device called a Qualified Domestic Relations Order (QDRO), has been developed to manage the fact that accounts may be community property in family law even if not immediately divisible. In the simplest terms, a QDRO sets out the terms for distribution at some distant date.
The legislation that governs most employer-sponsored retirement accounts is ERISA. QDROs apply only to ERISA accounts, including pensions and 401k’s. IRAs are not subject to QDRO and can be directly divided while maintaining tax advantage. Government-sponsored retirement accounts are also outside of the QDRO process because they were not created under ERISA. A parallel process exists for these accounts which functions in a broadly similar manner.
As with all division of assets, well-established guidelines will act as the starting point. The specific QDRO will depend on the facts of the matter. The most important factors to move the QDRO away from a 50/50 split include accumulation before marriage and equity.
QDROs may be part of an overall settlement negotiation, with one spouse relinquishing future rights to funds in exchange for other assets. Such negotiations have to be approved by the judge, who will look for overall balance and equity and who may be skeptical of extreme proposals.
The details involved in crafting a QDRO, within an overall settlement, are complex. Please consider this aspect within a divorce and contact us if we can provide further information.