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Dividing Retirement Plans in Divorce

by Phil Levin, Esq. on February 2nd, 2016

Since almost 48% of marriages in the U.S. dissolve, it is important for legal, investment, and accounting professionals to be aware of the financial, tax, creditor, and health related issues that advisors must be aware of when dividing retirement assets for divorcing couples.

For example, if an ERISA plan is transferred to an ex-spouse, the recipient spouse can take withdrawals from the account without having to pay a 10% early withdrawal penalty upon the transfer, although the recipient spouse will still have to pay ordinary tax on all amounts withdrawn. In contrast, with an IRA, the recipient spouse will have to pay the 10% penalty if he/she withdraws funds prior to attaining age 59½ in addition to an ordinary income tax withholding. Thus, if a divorcing couple has both IRA and ERISA plans, and one spouse intends to begin taking withdrawals before age 59½, the withdrawing spouse will be better off receiving the ERISA plan. For the same reason, the parties might even consider swapping retirement plans.

Depending on state law, ERISA plans, and some IRAs, are protected from the claims of most creditors. For example, if we assume the husband has creditor problems, then the husband should retain all of his retirement plans, and possibly even the wife’s retirement plans. The property settlement can then be structured so that the wife would receive other assets of equivalent value. In such an event, consideration must be given to the fact that the retirement benefits are subject to income taxes, thereby “reducing” the husband’s ultimate share.

Finally, if a defined benefit plan is an asset for a divorcing couple and the participant (assume husband) believes he is in great health and, therefore, will outlive the mortality tables, then he should retain the fair market value of the defined benefit plan, as calculated by an actuary, and transfer other assets of equivalent value to his wife. As such, the husband may obtain a greater benefit than actuarially calculated by the plan administrator. Once again, the income tax consequences must be carefully considered when dividing property between divorcing spouses.

If you are interested in scheduling a complimentary consultation with attorney Phil Levin, Esq. to discuss trust and estate planning, or probate matters, please call The Levin Law Firm at (610) 977-2443.

To learn more about how The Levin Law Firm can create an estate plan designed to help you and your clients achieve their incapacity planning and wealth transfer goals, please contact our office to schedule a Complimentary Consultation at (610) 977-2443.

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