.2607271259103.png)
When people think about dividing property during a divorce, the family home, vehicles, personal property, and other immediate concerns may come to mind first. However, retirement accounts can be among the most valuable assets involved in a North Carolina divorce.
401(k)s, pensions, IRAs, government retirement benefits, and other retirement assets may represent years or even decades of savings. When some or all of those benefits were earned during a marriage, they may need to be considered as part of the equitable distribution process.
Understanding how North Carolina generally treats retirement accounts during divorce can help you better understand the property division process and the questions you may want to discuss with an attorney.
At Jetton & Meredith, our Charlotte family law attorneys help clients navigate divorce and equitable distribution matters, including cases involving retirement accounts and other significant marital assets.
Are Retirement Accounts Divided in a North Carolina Divorce?
Retirement accounts may be subject to division through a process known as equitable distribution. In North Carolina, equitable distribution is the legal process used to classify, value, and distribute marital and divisible property between spouses.
Importantly, equitable distribution does not necessarily mean that every asset will simply be divided in half. North Carolina law generally begins with the presumption that an equal division of marital and divisible property is equitable, but courts may consider certain statutory factors when determining whether an equal division would be equitable.
For retirement benefits, the first question is often how much of the account or benefit is considered marital property.
A retirement account is not necessarily entirely marital or entirely separate. Depending on when the account was established and when contributions or benefits were earned, an account may contain both marital and separate portions.
What Types of Retirement Accounts May Be Divided in Divorce?
Many different types of retirement benefits may need to be considered during equitable distribution, including:
- 401(k) plans
- 403(b) plans
- Traditional IRAs
- Roth IRAs
- Pension plans
- Government retirement plans
- Certain military retirement benefits
- Other deferred compensation and retirement benefits
The process for dividing these assets can vary significantly depending on the type of plan. An IRA, for example, is not handled in exactly the same manner as an employer-sponsored 401(k) or pension plan.
For that reason, identifying the type of retirement account involved is an important part of determining how it may be addressed during a divorce.
What Is Marital Property vs. Separate Property in North Carolina?
North Carolina law distinguishes between marital property, separate property, and divisible property when spouses go through equitable distribution.
Generally, marital property includes property acquired by either spouse during the marriage and before the date of separation, subject to exceptions under North Carolina law.
Separate property generally includes property acquired before marriage as well as certain property acquired during the marriage, such as qualifying gifts or inheritances. Property acquired after separation may also be treated differently depending on the circumstances and source of the property.
Divisible property is another category recognized under North Carolina law and can include certain changes in value and property rights that occur after separation but relate to marital property.
These classifications can become especially important when retirement benefits were accumulated over a long period of time.
When Is a Retirement Account Considered Mixed Property?
Retirement accounts commonly contain both marital and separate interests.
For example, someone may begin contributing to a 401(k) several years before getting married and continue making contributions throughout the marriage. In that situation, the entire account balance should not automatically be assumed to be marital property.
The portion associated with the period before marriage may have a separate-property component, while benefits accumulated during the marriage and before separation may have a marital component.
Determining those portions may require reviewing account statements, contribution histories, plan documents, dates of employment, the date of marriage, and the date of separation. The appropriate method can also depend on whether the asset is a defined contribution account, such as a 401(k), or a defined benefit plan, such as a traditional pension.
How Are 401(k)s and Pension Plans Divided in Divorce?
Employer-sponsored retirement plans may require additional steps before benefits can be transferred to a former spouse.
Many private employer-sponsored plans governed by federal law use a Qualified Domestic Relations Order, commonly called a QDRO.
A QDRO is a court order that recognizes another person's right to receive some or all of the benefits payable under a qualifying retirement plan. The spouse or former spouse receiving benefits under the order is generally referred to as the "alternate payee."
A QDRO must satisfy federal law and the requirements of the particular retirement plan before the plan administrator will recognize it.
Not every retirement asset uses a QDRO. For example, IRAs are generally divided under different procedures pursuant to a divorce or separation instrument. Government and military retirement systems may also have their own rules and required orders.
Because these requirements vary, the language used to divide a retirement asset can be an important part of the property division process.
How Are IRAs Divided During Divorce?
Traditional and Roth IRAs are treated differently from many employer-sponsored retirement plans.
A QDRO generally is not used to divide an IRA. Instead, federal tax law provides mechanisms for transferring an interest in an IRA to a spouse or former spouse pursuant to a divorce or separation instrument without treating the transfer itself as a taxable transfer when the applicable requirements are satisfied.
However, taking money out of an IRA is different from properly transferring an interest in the account. Withdrawals can create tax consequences, making it important to distinguish between a transfer related to divorce and a distribution of retirement funds.
How Is Military Retirement Handled in a North Carolina Divorce?
Military retirement presents additional considerations because both state and federal law may apply.
The Uniformed Services Former Spouses' Protection Act (USFSPA) permits state courts, under certain circumstances, to treat disposable military retired pay as property in a divorce. The law does not automatically entitle a former spouse to a specific percentage of a service member's retirement.
There are also separate federal requirements governing when the Defense Finance and Accounting Service (DFAS) can make direct payments to a former spouse.
Military retirement cases can become particularly complex when issues such as disability benefits, survivor benefits, length of service, and the length and timing of the marriage are involved. VA disability compensation, for example, should not simply be treated as though it is ordinary divisible military retired pay.
Because of these additional federal requirements, military divorces involving retirement benefits may require careful analysis.
Are There Tax Consequences When Dividing Retirement Accounts?
Potentially.
Retirement accounts receive special tax treatment, and the way an account is divided or transferred during divorce can affect the tax consequences.
A properly prepared QDRO can allow certain retirement benefits to be assigned to an alternate payee without treating the assignment itself as an impermissible early distribution. Depending on what the recipient subsequently does with the funds, however, taxes or other consequences may still apply.
IRAs have different transfer requirements, and different types of retirement accounts can carry different tax characteristics.
Because tax consequences depend on the type of retirement asset, the method of division, and what happens to the funds afterward, divorcing spouses may want to discuss these issues with their family law attorney and an appropriate tax or financial professional.
Why Should Retirement Accounts Be Addressed Early in a Divorce?
Retirement accounts can represent a significant portion of a couple's marital estate. Identifying them early in the equitable distribution process may help the parties:
- Identify potential marital, separate, and divisible property
- Obtain necessary account statements and plan documents
- Determine whether additional valuation is necessary
- Identify potential tax considerations
- Prepare for settlement negotiations
- Determine whether a QDRO or another type of retirement order may be necessary
- Avoid delays when implementing a property settlement or court order
Retirement benefits can be particularly important when a marriage has lasted many years or when one spouse accumulated substantially more retirement savings than the other.
Talk to a Charlotte Divorce Attorney About Retirement Accounts and Equitable Distribution
Retirement accounts can represent years of work and long-term financial planning. When divorce occurs, determining how those assets should be classified and divided can be an important part of protecting your financial interests.
At Jetton & Meredith, our Charlotte divorce attorneys assist clients with equitable distribution and other financial issues that arise during divorce. Whether your marital estate includes a 401(k), IRA, pension, military retirement benefits, government retirement benefits, or other significant assets, our family law team can help you understand how North Carolina law may apply to your circumstances.
If you are considering divorce or have questions about the division of retirement accounts in North Carolina, contact Jetton & Meredith to schedule a consultation with our family law team.
This article is provided for general informational purposes only and is not intended to provide legal, tax, or financial advice. Reading this article does not create an attorney-client relationship. Laws and individual circumstances vary, and you should consult with a qualified attorney regarding your specific situation.