Divorce Mediation Resources - The Fourth in a new series of interviews! 

Forensic accountants in Divorce Mediation?
Dividing Retirement Accounts

We only have a house and retirement accounts, what hidden costs and taxes do we need to consider? How do we value and fairly divide these assets? Part two of two – the retirement accounts.

Retirement accounts are complicated!  How do we know the actual value?  What taxes need to be considered? Next to the family house, retirement accounts are the most common assets divided in a divorce. However, there are important issues to consider to understand the best way to divide these valuable yet mysterious assets!  To get the best answers for you, I asked very experienced forensic accountant Nancy Kearson! 

Nancy Kearson, CPA, ABV
CVA, CFF, MAFF

Nancy has expert credentials and many years of experience working in divorce. In addition to being a CPA, Nancy is also certified as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CFF (Certified in Financial Forensics), and MAFF (Master Analyst in Financial Forensics.) Most importantly, Nancy is a trained mediator and so understands the needs and objectives of parties who are mediating their divorce agreement. If you think there are financial issues in your divorce or family law mediation that need the input from a forensic accountant, let’s talk about it at the next mediation session!  Nancy can be reached directly at nkearson@earthlink.net.  Here from Nancy is Part two of two – regarding retirement accounts:

In this brief blog, we cannot discuss every possible hidden cost and tax related to fairly dividing your assets, but we can discuss some of the more common issues couples run into when going through the dissolution process.

Like your house, retirement accounts have hidden costs and taxes depending on how you ultimately divide them between you.

Retirement accounts can have added value when held, because no taxes are paid on any earnings in the account until the funds are distributed. Depending on your age you might have a substantial amount of years ahead of continued reinvestment of earnings that otherwise would have to be used in part to pay taxes.   In situations where you want to take advantage of long term tax deferred investment and are in position to hold the funds for future years, this may be an attractive option for division of your retirement assets. Taking retirement funds as part of your division of community property may be a singular opportunity to invest for your later years, and especially if you don’t anticipate your own earnings will be enough to make retirement contributions going forward.  

When you are ready to withdraw funds from your retirement accounts, you can take them as a lump sum or incrementally, but will need to report them as income and pay the related taxes.  If you are under 59 ½ years of age you will also pay a penalty of 10% for federal and 2.5% for California State of the amounts withdrawn. 

If you take a distribution from a qualified plan (401(k), etc.) at the time of your marital property division through a separate document called a Qualified Domestic Relations Order (QDRO), you can be exempted from the penalties.   You will still, however, have to report and pay the income tax on the funds distributed to you from the account unless you roll them into another retirement account.

Another option is for you both to agree that the retirement fund holder will “buy out” the other’s half of the retirement funds.  This can be a challenging situation in considering what tax discount if any, should be applied under this scenario.  One suggestion might be to discount the retirement funds at the tax rate the one being bought out would have to pay if they were distributed the funds outright and then liquidated them at the time of division.  There are also those that would suggest that since the taxes are not immediate (typically within a year) and specific, no discount should be made for taxes, and particularly in light of the continuing opportunity to reinvest earnings with taxes deferred into the future.  Mediation is the opportunity to craft a decision based on your circumstances that will work the best for both of you.

Due to retirement related tax considerations, most couples divide the retirement funds separately from their other assets, even if there is only a house and retirement accounts.  Although not always applicable, often the total amount of all the retirement accounts is divided in two with each taking the accounts in their name, and then using one account or more to rollover a portion to a rollover IRA account to equalize a total of one half to each.  Then each of you can make a decision about how long you expect to hold the retirement accounts you received with each being responsible for the taxes on their one half, whether held for reinvestment or liquidated.

If the community has one or more defined benefit retirement accounts that pay a monthly amount for life beginning at a certain retirement age, the community property portion of this type of account may be divided separately by the retirement account administrator.  There would then be an account for each of you with an amount payable monthly when you reach the plan’s retirement age.  Alternatively, the defined benefit pension plan account can be valued by an actuary and the actuarial value divided against other non retirement assets, as under this alternative there would be no immediate tax triggering event.  These types of pension plan accounts are usually a benefit of some type of guild or union membership.

You may wish to consult with a forensic accountant to identify the types and values of your retirement accounts, and how best to divide the community portion, while keeping your future needs in mind. 

In mediation, where ever you can reach agreement you are comfortable with, you have the best opportunity to clear a path to move forward with your lives.  Consulting a forensic accountant may well be a valuable tool in reaching this goal in your mediation.

This article does not constitute legal or tax advice or specific advice of any sort. Be sure to consult with your family law attorney and other appropriate professionals as each situation is different.