I have been a divorce attorney practicing in Michigan since 1996. There has always appeared to be some question from the public about whether retirement accounts or pensions are subject to division in a divorce. There are also often concerns about the tax consequences of dividing these accounts. This blog addresses these particular questions.
Are Retirement Accounts Divided in a Michigan Divorce?
The very short and simple answer is, yes, they are. According to statue in Michigan, all retirement accounts, 401(k), 403(b), IRA and other similar qualified retirement accounts are clearly divisible in a divorce. The reasoning behind this is that generally all income and all property that comes into the marriage whether it is earned by one party or the other is considered marital property and subject to an equitable division in divorce. This means that regardless of whether the retirement funds are titled in the name of one party or both parties the account will be divided equally upon a divorce.
This only applies to the marital portion of the retirement accounts. This means that if you are the account holder and you can provide proof (typically a statement from the date that you were married) of the balance of the account as of the date of the marriage, then that amount will not be divided. So for instance if you had $100,000 in the account as of the date that you were married, and then as of the date that you get divorced you had $500,000, then you would be awarded $300,000 from the account and the other party would be awarded $200,000.
There is no tax consequences as a result of this division, typically, whatever company is administering the account will require the non-participant spouse to open the same type of account with them and then transfer the required amount to the other party's account. So for instance, if Ameritrade administers the participant's 401(k), then the non-participant spouse will have to open a 401(k) account with Ameritrade and Ameritrade will then transfer the required amount into the non-participant's account. Then there will only be a tax consequence or penalty if either party withdraws funds and those will only affect the spouse that has withdrawn the funds.
Are Pension Funds Divisible in a Divorce?
The same is true for pension funds however it is a little more complicated. Basically a Qualified Domestic Relation Order will have to be prepared after the divorce is finalized that will go to the plan administrator and the plan administrator will set up two separate pension funds. The participant can contribute to their own pension fund after the divorce and it will increase only the value of the participant's pension. When the participant spouse is eligible to collect their pension, then the non-participant can begin to collect their share of the pension. It is very difficult to state with accuracy how much the plan will pay monthly to the non-participant spouse until the participant actually reaches the age when she or he is eligible to elect to start the monthly payments.
If you have questions about a potential divorce and how it might affect your rights to retirement funds, whether titled in your name or your spouse's, please do not hesitate to contact us to schedule a consultation.