When the assets from your marriage are divided during the equitable distribution phase of the divorce, some of the most valuable assets may your spouse and your retirement plans. Great care must be followed in valuing and distributing the plans.
Understanding Your Type of Retirement Plan
Retirement plans are usually either defined contribution plans or defined benefit plans.
Defined Contribution Plans
Defined contribution plans are those in which the participant has an account balance in the plan, and earnings, interest, and dividends are added to the plan balance. When the participant retires and wants to receive the accrued benefits and earnings in the plan, the employee can usually take the monies out in a lump sum, or in the form of an annuity. Examples of this type of retirement plan are 401(k) plans and simplified employee pension plans.
Defined Benefit Plans
Now uncommon in the private sector, these plans were prevalent not very long ago. In a defined benefit plan, the employee is promised benefits upon retirement, calculated using a formula generally based upon the number of years of service, the employee’s age upon seeking retirement, and his or her most recent salary. These plans are common in the government sector.
Implications of the Divorce on Your Benefit Plan
Because of the length of time money grows in a defined contribution plan—and the number of years an employee works for an employer that has a defined benefit plan, the values of these plans can exceed the value of the marital residence (often the most valuable asset the parties have).
For valuing these retirement plans during the equitable distribution portion of the divorce, the present value of the retirement plans must be computed as of the date the parties separated. This is a complex calculation—and a costly mistake if not done right—which should be left to an expert.
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