Retirement savings can represent years of work, so dividing them during divorce can raise concerns about your financial future. In Pennsylvania, only the marital portion of a retirement account is divided. The state uses equitable distribution, which means the court divides marital property fairly rather than equally.
Factors can include your and your spouse’s age and the length of the marriage, income, health and ability to earn income. Retirement benefits earned during the marriage and before final separation are generally marital property.
Which retirement savings can be divided?
The marital portion of a 401(k), pension or other retirement benefit may be divided in divorce. Benefits earned before marriage are generally nonmarital. Pennsylvania may also treat the increase in value of certain separate property, such as property owned before marriage, as marital property.
For a defined benefit pension, Pennsylvania uses a formula called a coverture fraction to find the marital portion. The formula compares the time you earned the pension during the marriage with the total time you earned the benefit.
How are different retirement accounts divided?
The process depends on the type of account. Dividing retirement savings may involve:
- Identifying the portion earned during the marriage
- Establishing the value of pension benefits
- Using a qualified domestic relations order, or QDRO, for certain employer-sponsored plans
- Following separate transfer rules for IRAs
A QDRO allows certain employer retirement plans to pay a share of benefits directly to a former spouse. A payment to a former spouse under a QDRO is generally not subject to the 10% early-withdrawal tax. If the funds are later rolled into an IRA, an early IRA withdrawal may be subject to the 10% tax unless another exception applies. Regular income tax may still apply unless you roll over an eligible payment.
What can affect the amount you receive?
Pennsylvania courts may consider federal, state and local taxes when dividing marital property. Taxes, transfer costs and the type of plan can affect what an asset is actually worth to you.
Protecting your retirement interests during divorce
The balance on a retirement statement does not necessarily show how much is subject to division. When you earned the benefits, the type of account, its tax treatment and the documents required to divide it can all affect the outcome.
Understanding these details can help you see how retirement savings fit into your property division. Legal guidance can help identify the marital share and whether you need a QDRO or another way to transfer the funds before your divorce is final.