Divorce in North Carolina: Retirement Assets

Divorce is a legal process that requires a lot of attention. In North Carolina, the division of property, especially retirement savings accounts, is one of the most complex parts of the marital dissolution. North Carolina is an equitable distribution state. It means that the division of property is not necessarily equal but rather fair. It is crucial to note the classification of retirement savings and how the same is going to be shared between the two spouses as this will go a long way in increasing or decreasing the overall wealth of either husband or wife considerably.

Equitable Distribution in North Carolina

North Carolina is an equitable distribution state, meaning that the court will attempt to distribute the property fairly. Marital property means all the assets and liabilities taken on during the marriage, while separate property is generally considered what each individual spouse had prior to getting married, or was given as a gift, or inherited during the marriage.

For retirement accounts, it’s considered that the contributions made and or the growth made within them during the marriage will usually be considered marital property while the contributions made and or the growth of these accounts before the marriage stays as the separate property. The critical question shifts to identifying the share of a retirement asset which one is entitled to during a separation; the next critical question is dividing that asset fairly.

Qualified Domestic Relations Order (QDRO)

A QDRO is a legal document which gives rights to be paid any benefits to someone other than the employee, for example; a former spouse. QDROs are required for the distribution of 401(k) plans, pension funds and other similar employer-sponsored plans but do not cover IRAs. The QDRO document stipulates the terms of division and makes sure the non-participating spouse receives their share without any tax or penalty.

As an example, if a spouse receives 50% of the marital share in the 401(k) plan, this amount has to be paid out to that spouse as directed by the QDRO. Once this money is distributed, the recipient spouse may either roll it over into his or her retirement account or request that the funds be distributed to them in cash, which may be taxable.

Understanding the Classification of Retirement Accounts

Different types of retirement accounts are treated similarly in divorce, though the specific rules governing each type may vary slightly.

• 401(k) Plans: A 401(k) is an employer-sponsored retirement plan to which employees and sometimes employers contribute funds. When a couple goes through a divorce, the amount of 401(k) allocated during the years of marriage constitutes marital property. In considering divorce, the amount in the 401 K is considered marital property that will be fairly distributed. In order to divide the accounts in most cases, a QDRO (qualified domestic relations order) will need to be obtained.
• IRAs (Individual Retirement Accounts): IRAs are voluntary plans that one exclusively sets aside for retirement. Just as 401(k) any contributions or growth made during the marriage are classified as marital assets. However, a QDRO is not required to divide IRAs. They are divided at the time when transferring because of the divorce.
• Pensions: Usually associated with some employers, the pension plans are intended to provide income to an employee after retirement. Such a portion of the pension earned during marriage is marital property and its distribution often needs complicated computations. Just like 401 (k)s pensions are also classified and divided with the help of QDRO.
• Annuities: Annuities are retirement savings plans in which regular payments are made to the claimant (usually after the retirement period) through a contract with an insurance company. If the annuity was bought during the marriage then it is a part of marital property to be distributed fairly. Division of these assets can be complex depending on the type of the annuity and the mechanism of payout

Valuing Retirement Accounts

The first step in splitting retirement plans is estimating their value reasonably. This can be comparatively easy in cases of defined contribution plans, such as 401(k)s and IRAs where one knows the account balance. On the other hand, pensions and other benefit plans can be trickier. Most of the time, for instance, a court ordering a pension division will assign an actuary to figure out how much would be the present equivalent of the income that will be received in the future.

Call or Text Us Today! (919) 870-0466

Call Now

Dividing Retirement Assets Without a QDRO

In terms of assets such as IRAs and annuities, a QDRO is not needed. For this type of asset, a related process known as transfer incident to divorce is used to send a tax free amount of funds from one spouse’s IRA to the other spouse’s IRA.. However, any distribution out of the IRA afterward would incur taxation and possibly penalties.

As for annuities, they can be divisible or assignable to one spouse depending on how the contract is structured. And in a case when the annuity is to be divided between two parties, some contracts contain clauses that permit division of the amount, and other provisions may require a cash out and transfer of the funds to one spouse.

Tax Implications

There are tax consequences tied to the distribution of retirement properties during the divorce. For instance, if one makes use of QDROs, one can directly transfer one spouse’s retirement funds into the other spouse’s retirement funds without paying taxes on the amount. However, if the receiving spouse decides to take the money out as cash instead of transferring it to a retirement account, then they are likely going to have to pay taxes and possibly penalties.

There are no tax implications for transfers of retirement funds, including IRAs, made as part of a divorce proceeding. However, any amounts eventually withdrawn by the recipient spouse will be subject to tax as income. When dividing pension plans, taxation will be determined according to an with-profits or without-profits annuity. Qualified annuities will be taxable upon distribution, however non qualified annuities will only be taxed on the earnings.

Special Considerations for Military and Government Pensions

In the case of divorce, military and government pensions for its members are subject to certain terms as to how they can be shared. The Uniformed Services Former Spouse Protection Act (USFSPA)  permits the division of military retirement pensions in divorce proceedings, but there are many rules regarding the divorce eligibility of the participant that are unique to this type of retirement pension. Similarly, the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS) are subjected to specific provisions in the separation of policyholder’s retirement benefits.

Finalizing the Division of Retirement Assets

After the court decides on the distribution of retirement assets, it is necessary to prepare the appropriate legal documents. Each account having its own procedures, it is important to engage an experienced family law attorney for the division to be accurately and fairly done.