Deferred compensation refers to pension plans, 401K plans, IRAs and other retirement assets. Such plans are divisible as part of a property settlement in divorce regardless of which party is named on the plan. How they are divided depends on the value and nature of the asset. Perhaps one of the worst scenarios in a divorce is when retirement assets are transferred to a former spouse but the original owner is liable for the taxes, including penalties for early withdrawal.
There are three main kinds of deferred compensation plans.
Savings plans such as an IRA are considered "cash" plans since they may be liquidated before retirement age. They are divisible as part of a divorce. However, before any division may occur, a custodian of the account must receive and review a certified copy of the court order dividing the plan. Additionally, the spouse receiving a portion of the plan must fill out documents relating to the manner of payout. IRA proceeds may be cashed out and paid directly to the receiving spouse or they may be "rolled" over into a new IRA in the name of the receiving spouse. However, the tax consequences related to cashing out the plan may reduce the plan proceeds by more than thirty percent (30%) for taxes and early withdrawal penalties.
The valuation of a defined contribution plan can be determined by multiplying the account balance by the percentage of vesting. This is a relatively simple way to value the plan and determine marital value. Generally, such plans may be divided currently with each party receiving one half of the current vested value.
With a Defined Benefit Plan, generally the participant's benefits cannot be liquidated prior to their retirement age and the non-participant spouse may receive a retirement plan in his/her name representing his/her marital interest in the participant's plan. This plan is generally subject to the same terms and conditions of the original plan. Often, the participant may choose a payment method from several options. The chosen method will affect the amount or timing of the payments to both the participant and any receiving spouse. This may mean that retirement benefits are received when the original participant decides to retire, not when the recipient spouse retires. A defined benefit plan may be divided in one of two ways.
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