Many people are aware that Arizona is a community property state, and that in the event of a divorce, both parties divide all joint and community assets equally between them. However, when it comes to the nuts and bolts of dividing up retirement accounts, many people lack the knowledge of how this is accomplished. There are many types of retirement accounts; just a few of them are 401(K)s, defined benefit pensions, IRAs, and 403(B)s. Here are five things that many people don't know about the division of retirement in the event of a divorce:
1.There is no such thing as a “joint” retirement account. Retirement accounts are in the name of one party, and the IRS does not allow retirement accounts to be joint. However, just because your name doesn't appear on the title of a retirement account to which your spouse contributes during the marriage does not mean that you have no interest in your spouse's retirement account. You are still entitled to one-half the community property contributions made and its increases during the marriage.
2. One spouse doesn't have to cash out his or her retirement in order to divide it. Withdrawing money from a retirement account often triggers penalties and/or taxes, depending on the situation (including the type of retirement account and age of the person who holds it). There is a special kind of court order, called a Qualified Domestic Relations Order, or QDRO, that assigns one spouse his or her community interest in a retirement account of the other spouse and allows that spouse to effectively “roll over” his or her share into an account in his or her own name. The recipient spouse can then decide whether to let the funds remain in retirement or to pay any penalties and taxes and cash out some or all of them.
3. Defined Benefit Pensions can be divided with a QDRO, too. Such pensions are paid to a retired person in payments (usually monthly) to replace the retiree's income. If your spouse is expecting a pension at retirement, and at least part of that benefit has been earned during marriage, you may have an interest in those payments. A QDRO can be signed by the court and sent to the plan administrator so that you can obtain your portion of the community interest in the pension.
4. Military retirements are divisible, too. Just because your spouse is in the military and will continue to serve after divorce does not mean that you have no interest in his or her retirement. Military members often have more than one type of retirement benefit (such as monthly retirement payments and a Thrift Savings Plan, or TSP) and the marital community may have an interest in any or all of them. It is important to determine exactly what the non-military spouse's interest is so he or she is certain to receive it.
5. Contributions that were made to a retirement before marriage or after a divorce petition has been filed in court and served on the other spouse are not community. If you have a retirement account that contains premarital contributions, you may have continued to contribute to this same retirement account after marriage. The premarital contributions are not community, but remain your sole and separate property. Only the community portion is divided between the spouses.
There are a wide variety of retirement accounts, all of which have their own specific characteristics. When dividing retirement accounts pursuant to a divorce, hiring a knowledgeable attorney can go a long way to ensuring that you and your spouse are each awarded your fair share.