Valuation Issues Faced in Dividing Retirement Accounts Upon Divorce

Retirement accounts — such as a pension, IRA or 401k — can present particularly difficult questions when dividing up property in a divorce. Although an account may be funded by either spouse’s earnings or benefits from service to an organization, Arizona’s community property law presumes that it is community property to the extent the benefits become vested during the marriage. That means a 50/50 split in the event of a divorce.

Contributions to retirement accounts during the marriage include monetary contributions by a spouse, matching funds by their employer and increased benefits to a pension as the result of years worked or other qualifying actions. If you were contributing to a retirement account before your marriage, anything deposited up to the date of marriage is considered your sole and separate property. The same is true of any contributions or services accrued after the date of separation from your spouse.

Valuation of retirement accounts can present special challenges. Only the portion of the account that accrued during the marriage is considered community property. For retirement accounts based on contributions, such as a 401(k) or an IRA, the amount subject to division is measured by the increase in value from the date of the marriage until the date the couple separated. However, there may be contingencies affecting the valuation, such as when the employer’s matching funds, if any, have vested.

More complicated are pension, profit-sharing or stock-option plans, which are not driven by contributions. Their value are often based on the worker’s years of employment, the salary earned in the year prior to retirement and other contingencies like the worth of the company’s stock. If the employee is still working as of the couple’s separation date, the benefits are not likely to be fully vested, and so the valuation may require a more subjective analysis.

An important aspect of dividing retirement accounts is that it often involves withdrawal of funds, which can affect the account’s tax-deferred status. If withdrawals are made before retirement age, the funds are immediately subject to federal income tax and the owner is charged a 10 percent penalty.

To avoid this, a special order known as a qualified domestic relations order (QDRO) is needed. This is a court order directing the plan administrator as to how the account funds should be withdrawn and reallocated to the other party after divorce. A properly executed QDRO prevents imposition of penalties.

Since retirement accounts can be difficult to value, especially for benefits not yet vested, an Arizona divorce attorney skilled in this area can be indispensable to achieving a fair property settlement.

The lawyers at Clark & Schloss Family Law, P.C. are experienced in helping Arizona residents navigate the divorce process and obtain the best possible outcomes in their cases. To schedule a consultation at our Scottsdale office, call 602-789-3497 or contact us online.