A retirement plan is a significant percentage of your wealth. The law almost always considers your retirement plan to be marital property. This means that if you divorce, your spouse is entitled to a percentage of your plan and vice versa.
Forbes stresses the importance of understanding how the division of retirement plans works, to protect your interests.
How to divide a pension
A pension is a defined benefit plan. This type of plan is tough to divide because it lacks cash value presently. Instead, it is a promise to pay the employee a set amount every month at retirement. If you accumulate benefits before marriage and after divorce, however, these benefits are not a part of the marital property.
There are three ways to divide a pension plan. On one hand, the court can use the cash out method, where one spouse receives a lump sum. Another way is through reserved jurisdiction. The court retains authority to order the distributions in the future. Deferred division is the final method. It does not involve determining a present value and instead, each spouse receives a share of benefits if and when the employed spouse receives them.
How to divide a 401(k)
Since the 401(k) has a daily cash value, it is easier to split it in a divorce. The courts will use a QDRO to divide the money. If you receive payments from your spouse’s 401(k), you can roll the payments over to a retirement account without tax consequences. As a recipient, you would have to pay income tax on the payments that you receive, if you spend them.