Florida divorce lawyers often refer to the typical client as a “W2 employee.” This is the type of person whose income is derived from working for someone else, and not having series of exotic assets like self-owned businesses or investment properties. W2 employees typically only have two major assets: their house and their retirement accounts.
Dividing up a house in a divorce is as simple as estimating its value and awarding half that value to each spouse (or selling the house and distributing the proceeds.
Dividing up a retirement account in a divorce can be bit more complicated, depending on the type of retirement account. Most Americans retirement accounts are in the form of a defined contribution retirement account.
A defined contribution retirement account is a 401(k), 403(b), an IRA or a Thrift Savings Plan. These accounts always have a specific balance and the owners of the account typically make periodic contributions (usually out of their paycheck)
If the entirety of the defined contribution account was accumulated during the marriage, the division is simple: each spouse gets 50% of the total of the account. The spouse whose name is not on the account will accrue significant tax penalties if they withdraw the money directly from the defined contribution account. There is a way to avoid these tax penalties by preparing a “QDRO” which we’ll discuss later.
If the defined contribution account was accumulated entirely before the marriage or it a portion of the defined contribution account, that premarital amount remains premarital.
The whole point of the saving for retirement is to have the investment grow. What happens to the growth of those investments if the growth occurs during the marriage?
The precise valuation of the marital portion would normally require that the appreciation of the premarital portion be calculated separately from that of the marital portion. Anson v. Anson, 772 So.2d 52, 55 (Fla. 5th DCA 2000) “Passive accumulations on the nonmarital portions of an asset are not subject to equitable distribution.” Jahnke v. Jahnke, 804 So.2d 513, 517 (Fla. 3d DCA 2001). But the burden of proving what the non-marital portion of the account is exactly remains on the party trying to preserve that portion as non-marital. Yitzhari v. Yitzhari, 906 So.2d 1250, 1254 (Fla. 3d DCA 2005)
If this sounds complicated, it’s because it is extremely complicated. In reality, the courts don’t look at a retirement account and determine to the exact penny what was non-marital, what was marital and what were the increases on each portion. Instead, the courts have the parties prepare a QDRO or Qualified Domestic Relations Order.
A QDRO is essentially a form that each retirement account company (Fidelity, Vanguard, etc) has that instructs the retirement account company on how to divide the accounts. Typically, the QDRO will instruct the company to divide “the marital portion” of the account. The company then uses actuarial software to determine, to the exact penny, what portion was non-marital, what portion was marital and what were the increases on each portion. Instead of cashing out the defined contribution retirement plan to give the other spouse their portion, a QDRO creates a brand-new defined contribution retirement plan in the other spouse’s name. This allows the other spouse to preserve all of the tax benefits that a IRA, 401k, or Thrift Savings Account can provide.
If the other spouse does not want the money from a defined contribution retirement account to remain in a defined contribution retirement account, they can just have the spouse holding the account cash out the portion of that account. But, the other spouse getting the cash out must indemnify the account-holding spouse for the tax penalty. The tax penalty is often so steep (25%) that the other spouse should end up taking less than their half to accommodate the account-holding spouse.
A better solution to this cash-out example is execute a QDRO and have the other spouse cash out their own, brand-new defined contribution retirement account.
Naples, Florida is home to tens of thousands of retirees. Almost all of which have some kind of retirement account which, along with their house, is their biggest asset. Learn more about what’s going to happen to this asset in your divorce by contacting my Naples, Florida family law office for a free consultation.