How Are 401(k), IRA & Pension Assets Divided in a Connecticut Divorce?

Married couples often pool their efforts, and their resources, to accumulate a “nest egg” of retirement assets they plan to use in their old age. But what happens to the 401(k), IRA and pension assets in a divorce? Does it matter whose name they are in, who earned them, or where your retirement income will come from?

Do Retirement Assets Count in Connecticut’s Equitable Distribution System

Unlike some other states, Connecticut doesn’t separate a person’s “separate property” from the marital property a couple accumulates together after the marriage. Connecticut’s equitable distribution system counts “all property” owned by either spouse – even retirement assets they owned before they got married. That means, when you get divorced in Connecticut, the court has jurisdiction to divide all your 401k, IRA, and pension accounts in any way it deems fair.

How are 401(k)s and Roth IRAs Split in a Divorce

Just like all other property, your retirement accounts are subject to “equitable distribution” by the Connecticut courts. This doesn’t necessarily mean an equal 50/50 split down to the penny, but it does mean that the total distribution must be fair to both parties, based on many factors. In many two-income households, where both parties earn and save about the same amount, an equitable distribution may mean that each party should keep his or her own 401(k)s or pre- or post-tax IRA accounts (Roth IRAs and SEP IRAs, for example).

However, where the family has combined their retirement assets, or when one spouse is the primary wage earner, you may need to divide up the balance of your 401(k) or IRA to reach a fair result. This is done through a Qualified Domestic Relations Order, or QDRO for short. (Certain government employees who have 403(b) accounts must use an Eligible Domestic Relations Order or EDRO instead, but they are functionally the same thing). A QDRO is an order entered along with or after your Judgment of Divorce that directs your financial management company to divide one retirement account into two accounts – one in each party’s name. Using a QDRO to do this – rather than just withdrawing money from your retirement accounts to pay off your spouse – keeps you from suffering early withdrawal penalties and tax consequences that would otherwise apply to the transfer.

When dividing 401(k)s, 403(b)s, and other pre-tax retirement accounts, it is important to consider when and how both parties will be taxed on those assets. Using a QDRO can avoid taxation on the transfer from one spouse to the other. However, if a dependent spouse expects to need access to those funds right away (before they reach retirement age), that spouse will likely still incur taxes and penalties from the withdrawal. In that case, it may be better to assign that spouse other assets (like bank accounts or post-tax retirement assets), or have the parties split the cost of those penalties.

Although the court has jurisdiction over essentially all retirement assets, the value that accrued before the marriage is usually treated differently. One common way to do this is to multiply the asset’s value on the date of the divorce judgment by the “coverture fraction”, in which the numerator is the number of years in the marriage, and the denominator is the total number of years for which contributions were made. To use a simple example, if a plan participant has been married for five years and has worked and contributed to a retirement plan for ten years, then the coverture fraction would be one-half (½), and that is the portion that would then be divided. In this example, if total value of the asset is $100,000 and the marital portion were being split 60/40, then the non-contributing spouse would receive 20% of this asset or $20,000 ($100,000 X ½ = $50,000 X 40% = $20,000).

Special Concerns When Dividing Pensions in Divorce

Putting a value on a retirement account like a 401(k) is relatively easy. Customers get statements quarterly that show how their money has been invested, and what it is worth at the end of that period. Pensions aren’t so easy. A pensioner is entitled to monthly payments of a set amount every month from their retirement date until their death. Dividing pensions generally works in one of two ways:

1. Each spouse receives a fixed percentage of the monthly benefit
2. The non-pensioner spouse may receive a set amount each month

However, a pensioner can sometimes elect to retire early or defer retirement for a few years, changing the amount they are eligible to receive based on that decision. These kinds of decisions made by an ex-spouse can change the other spouse’s pension payments even years after the marriage is over.

To address this, many Connecticut divorce attorneys include provisions in their judgment requiring the pensioner spouse to offset any difference. They may also require the non-pensioner spouse to maintain a survivor benefit on the account (however, this sometimes reduces the total amount either party will receive). Finally, you may be able to negotiate a “buy out” of the non-pensioner’s interest in the pension using other marital assets or retirement funds. These options help to provide certainty and prevent surprises when retirement age finally arrives.

Dividing Retirement Income in Pay-Out Status

When older couples end their marriage, these so-called “gray divorces” raise questions of their own, specifically about how retirement assets will be divided. Often divorcing seniors are already retired and depending on retirement income to meet their day-to-day needs. If you are at or near retirement age, be sure to discuss your financial needs and plans with your divorce attorney. That way, you can protect your interest in dividing retirement income, and possibly use alimony and social security benefits to supplement your income during retirement.

Get Help Advocating for a Fair Retirement Asset Division in Your Divorce

The divorce attorneys at Lawrence & Jurkiewicz represent people in Hartford and Litchfield County who need help with divorce and related family law issues. We understand how Connecticut courts treat retirement assets, and the practical consequences that can come from a poorly drafted order distributing retirement income. Please contact us today online or at (860) 264-1551 to schedule a confidential consultation to see how we can help you.