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Dividing retirement accounts as part of equitable distribution can be complex. It is important that you discuss any questions you have regarding this issue with an experienced Raleigh family law attorney.
What to Know About Retirement Accounts and Divorce
Below are a few common questions and our answers that may be helpful while navigating issues around dividing retirement accounts during a divorce in North Carolina.
1. What is a Qualified Domestic Relations Order (QDRO?)
A qualified domestic relations order, often abbreviated as “QDRO,” is a court order that sets forth the marital property rights of the former spouse of a participant in certain qualified retirement plans. Many restrictions and requirements apply, which makes consulting with an experienced Raleigh divorce attorney so important.
2. Do I Have a Right to my Former Spouse’s Retirement Benefits?
Under North Carolina law, retirement plans that are funded in part or in whole during the marriage would be considered a marital asset subject to equitable division to the extent the account was funded during the marriage and prior to the date of separation. A QDRO (see above) is a mechanism by which interests in certain retirement plans are divided.
3. Do QDROs Divide Retirement Accounts Only for the Purpose of Dividing Marital Assets?
No, a QDRO can also provide for child support or alimony payments. The QDRO functions to recognize the right of an individual, other than the owner of the interest in the retirement plan, to receive all or a portion of that person’s benefits under a qualified retirement plan.
4. What Other Options are Available to Divide an Interest in a Spouse’s Retirement Plan?
Since equitable distribution is the division of the marital estate as a whole, depending on the other assets/debts in the marital estate, one party may choose to trade off their interest in a retirement account by taking other assets so that in the end, each party is getting the equitable distribution of the marital estate they deserve.
For example, instead of the parties dividing a 401(k) account in Husband’s name valued at $10,000.00 and a 401(K) in Wife’s name valued at $15,000.00, the parties may decide that each party will keep their own accounts and Husband may get extra cash to offset the unequal division. One must keep in mind that $1,000 in cash is not equal to $1,000 in retirement funds due to the tax ramifications. A precise calculation of the net value after taxes would need to be done to ensure a fair cash offset is calculated.
5. What is Not Considered a “Qualified Plan” in the Context of a QDRO?
Individual retirement accounts, certain annuity plans, and certain deferred compensation plans. If you are unsure what kind of retirement account you have, you can look at your statement or contact your employer’s Human Resource Department.
A detailed description of the retirement benefits provided by your current or former employer should explain what kind of account you have (such as a 401(k) account or 403(b) account) so that you can identify whether or not you have an interest in a retirement plan that is considered a “qualified plan” requiring the entry of a QDRO to divide the same with regard to equitable distribution.
6. When Retirement Plans are Divided Pursuant to a Court Order, What are the Tax Consequences?
If no QDRO is entered, the distribution paid from the retirement plan will be taxed to the plan participant and a 10% penalty will be applicable. If a QDRO is entered, those funds will not be taxable to the participant in the plan. The party receiving the funds that are a spouse or former spouse of the participant in the retirement plan will not be taxed or penalized so long as the funds are rolled over into an individual retirement account within 60 days of receipt.
If the spouse or former spouse elects to receive cash rather than rolling over the entire amount of the retirement funds pursuant to the terms of the QDRO, the spouse or former spouse receiving the funds would pay federal and state taxes, but would not be subject to the 10% early withdrawal penalty.
7. How Does One Know What is the Best Method for Dividing Retirement Accounts as Part of Equitable Distribution?
With the help of an experienced family law attorney and tax professional, clients can explore any exceptions they may qualify for in order to avoid the early withdrawal penalty in certain circumstances, and consider whether it is financially in their best interest to take a cash payment in lieu of rolling the funds in an individual retirement account or possibly leaving it in the plan for distribution at a later date.
Because of the complex legal and financial issues involved, it is important to get advice from knowledgeable professionals to make an educated decision when settling equitable distribution claims involving retirement accounts or presenting your case before a judge to ensure that you get the equitable distribution of the net marital estate you deserve.
Consult with a Raleigh Divorce and Alimony Lawyer
If you have additional questions or concerns about equitable distribution in North Carolina, QDROs, or retirement account division, please contact our office to schedule a consultation with one of our experienced Raleigh family law attorneys. Call today at (919) 301-8843 or fill out the contact form below.