Often people ask me about how to divide retirement assets when they get divorced. As I’ve mentioned before, Minnesota is a marital property (or common law) divorce state. It is not a community property divorce state. (Most states are community property states. Minnesota is not.)
In Minnesota, a division of assets is supposed to be “equitable,” not “equal.” These two concepts are not the same. The reason this is important for you to know is that, depending upon the skill of the divorce lawyers, there can be a lot of “slop” when people get divorced. Sometimes valuation dates get messed up, sometimes values are incorrectly determined, sometimes values change dramatically during the divorce process. The result can be a property division that is not particularly “equal.” But, it could be “equitable.”
In Minnesota, a court can take up to one-half of a spouse’s non-marital property and award it to the other spouse. Yep, you heard it correctly. A Minnesota divorce court can take up to one-half of the property you had before you were married and award it to your spouse. This does not happen very often, but it does happen.
So, what about retirement assets? There are several kinds of retirement assets–IRAs, Roth IRAs, 401(k) plans, and pension plans, to name a few. IRAs and Roth IRAs can be divided by means of a direct rollover. Essentially, the divorce decree describes the IRA to be divided and states how it is divided–that is, how much each spouse receives. One spouse or the other takes the decree to the bank and the bank rolls a specific dollar amount into a new account for one of the spouses. Its a pretty straight forward process.
401(k) plans and pension plans are not as easy to divide. They require something called a “Qualified Domestic Relations Order” known as a “QDRO” for short. A QDRO is a court order that conforms to requirements of federal law (mostly ERISA) that directs a plan administrator to take a particular action–in this case, to take some money from a 401(k) plan, for example, and give it to the non-participating spouse. The end result is the same as with an IRA–the non-participating spouse gets some cash in his or her own account. But, its a lot more work. The QDRO has to be correclty worded and it has to meet with the approval of the plan administrator. The reason for this is that if a distribution is made improperly, the qualified tax status of the entire plan can be jeopardized. Depending upon the size of the plan and the number of participants, a mistake like this could be catastrophic for the plan administrator. So, the QDRO has to be correctly written.
It can be a bit more tricky to divide a pension. One reason for this is that many pensions have an indeterminate payout. In other words, you know that when you retire, you’ll get a certain monthly payment. But, you do not know how much that monthly payment will be until you actually retire. Its going to depend upon how much money is in the retirement plan and how many retirees are sharing it.
So, in that case, a QDRO is written that describes a fraction. Without getting too technical, basically the non-participating spouse receives one-half of the monthly payment that is attributable to the years of marriage. The participating spouse receives one-half of the monthly payment that is attributable to the years of marriage, plus all of the monthly payment that is attributable to the post-marriage years. This is expressed by a mathematical equation that takes into account the years of marriage and the total number of years of participation in the plan.
There is also something called a survivor annuity. You need to research this by getting complete information from the plan administrator. Many plans have something similar to an “insurance policy” that allows for continued payments to a non-participating spouse when the participating spouse has died. Often, when one takes advantage of this, the monthly payments upon retirement are somewhat less. Also, many plans have a provision that when the non-participating spouse dies, the participating spouse’s monthly payment is increased to the amount that it would have been had an award not been made to the former spouse. Check this out, and when writing the QDRO, do not leave money on the table.