Retirement plans are subject to division through equitable distribution, just as any other marital asset would be. All assets and debts will be divided; bank accounts, time-shares, retirement accounts and even frequent flier miles are subject to distribution.
The first step in dividing a retirement account is to determine how much of the plan is marital property, and thus subject to distribution. Depending on the circumstances, all or a portion of any given retirement plan could be considered separate property. For instance, if the retirement was earned prior to the marriage, it would be considered separate property and therefore not subject to distribution.
After it has been determined that some portion of the plan is marital, the plan will have to be valued. This is easier for some accounts than others. An IRA is easy to value; simply look at the balance on the date of separation. Other accounts, such as non-vested pensions, or a defined benefit plan prove more difficult to value. In more complicated situations valuation may require hiring an expert, like a CPA, to analyze the numbers and come up with a value.
Distribution is the final step – and can also prove tricky when it comes to retirement accounts. Depending on the type of plan you are dividing, there will be certain rules you must follow to avoid taking a tax hit when you divide the account. IRA’s are fairly straightforward, you’ll need to make sure the transaction is structured as a transfer or rollover so that you can avoid the early withdrawal tax. Other plans, may require the use of a Qualified Domestic Relations Order or other similar vehicle to divide the plan without experiencing a tax penalty.
There are unique rules for each retirement plan, so make sure you know how to divide your retirement plan without triggering a tax event.