The year 2015 saw 813,862 divorces in the U.S., according to the Centers for Disease Control and Prevention (CDC). Of the many stresses of a divorce, a couple must face dividing financial assets, including retirement accounts. Virginia has specific procedures to ensure the fair division of 401(k) plans, Individual Retirement Accounts (IRAs), and pensions.
Virginia Courts Value Retirement Accounts as Either Separate or Marital Property
When dividing assets in Virginia, the courts decide which assets legally belong to both spouses together and which belong to each spouse individually. This is commonly known as valuation, which separates assets into marital and separate property. Under Virginia law, retirement accounts fall under the umbrella of marital property and are divided as such, with two main exceptions. The most common types of retirement accounts are either defined as contribution plans—such as IRAs, 401(k)s, or Thrift Savings Plans (TSPs)—or defined benefit plans, also known as pensions. Generally, Virginia courts view these types of retirement accounts as marital property, even if:
- The account accrued value before and after the marriage
- The account is only in the name of one spouse
To understand more thoroughly how Virginia law divides retirement account assets, it’s important to explain how contribution and benefit accounts work.
Dividing Defined Contribution Plans
As part of a defined contribution plan, both employees and employers contribute a set amount or a percentage of a paycheck each month to a savings account. These savings account funds build until the employee goes into retirement. If, during the course of a marriage, the employee spouse contributes to a 401(k) or other retirement account such as an IRA or a 403(k), Virginia courts consider the following when dividing its value between spouses:
- The dates of the marriage. If the marriage lasted 20 years, and the employee spouse contributed to the 401(k) for 25 years, then the contributions made to the account in the years preceding the marriage are exempt from division of assets. Those five years of individual contributions are protected as separate property.
- The 50 percent rule. Virginia courts want to ensure fairness when splitting the value of retirement accounts. While allocating assets from the 20 years of eligible retirement account contributions, Virginia holds that the non-employee spouse must not receive more than 50 percent of the marital value. Therefore, if the non-employee spouse is eligible for a full 50 percent of the retirement account’s value, she will receive 10 years’ worth of contributions.
Dividing Defined Benefit Plans
Defined benefit plans are pensions. One spouse may have a pension from acting as a civil servant, serving in the military, or being a part of foreign service. Employers contribute a predetermined amount to an employee’s pension each month based on a special and unique formula, and the employee has access to the account when she goes into retirement. When dividing the value of a pension, courts or spouses may choose to:
- Divide after valuation. Courts may order, or both spouses may elect, to have the pension’s present value calculated by an actuary service. Then, the two parties may choose to incorporate the eligible portion of the pension into the overall value of asset division.
- Divide at the time of retirement. Additionally, spouses may choose to mutually agree to divide the shares on their own. Then, at the time of retirement, the non-employee’s share will be paid to him. To do this, the divorcing parties may submit a Qualified Domestic Relations Order (QDRO) to the court, outlining the way in which pension assets will be divided.
It’s important to note that if both spouses can agree on a method of distribution, they may choose to divide assets differently than the court would—to more closely meet their individual needs at the time of divorce.
Additionally, it’s possible to use a QDRO to avoid any tax fees or penalties associated with changing or withdrawing from a retirement account. Using a QDRO can create an easier path for transferring portions of retirement accounts or pensions to a non-employee spouse without being penalized financially.
Property Division and Divorce Attorneys You Can Trust
If you’re going through a divorce and want to speak with an experienced attorney about dividing retirement accounts, we are here for you. The legal team at Kearney, Freeman, Fogarty & Joshi, PLLC, has served Northern Virginia for over 30 years from our office in historic downtown Fairfax, and we are ready to provide you with quality legal services, too. To get started on your case, live chat with us on our website.