In the state of Florida, retirement accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, and pension plans, are considered marital assets, and as such, are subject to equitable distribution in a divorce. How retirement accounts are divided depends on several factors.
It is important that divorcing couples understand the requirements involved in dividing retirement accounts, such as using rollover accounts and qualified domestic relation orders (QDROs) to avoid early withdrawal penalties or taxable events.
All of the plans listed below are subject to equitable distribution during a Florida divorce.
- 401(k) Plans: A 401(k) plan is an employer-sponsored plan allowing employees to contribute portions of their income for retirement. This tax-deferred account is the personal property of either spouse.
- Self-Employed Pensions (SEP): A SEP plan is established by a self-employed individual working either full or part-time. Contributions remain tax-deferred until withdrawal.
- Roth IRA: A Roth IRA is a retirement account that utilizes after-tax contributions for retirement. All future withdrawals are tax-free.
- SIMPLE IRA: A SIMPLE IRA is a tax-deferred retirement plan where salary deductions are contributions, and employers make matching or non-elective contributions.
- 457(b) Plans: A 457(b) plan is a tax-advantaged retirement account for government and non-profit employees with traditional or Roth IRA variants based on tax deduction timing.
How Are Retirement Accounts Divided During Florida Divorce Proceedings?
Dividing retirement plans in a Florida divorce involves establishing their value, avoiding early withdrawal fees, and using the proper forms. Retirement accounts are considered marital assets and are therefore subject to Florida’s equitable distribution laws.
How are 401ks and Self-Employed Pensions (SEP) Divided in a Florida Divorce?
The Florida retirement system follows equitable distribution when dividing retirement benefits during divorce. Note that assets acquired before the marriage are typically not considered for division.
Marital assets, including vehicles, retirement accounts, and other marital property, are divided equitably according to specific factors like the following.
- Marriage length
- Overall economic standing of each spouse
- Each spouse’s contributions to the marriage (contributing to marital and non-marital property or assets)
- Each spouse’s debts and liabilities
Pension benefits and traditional retirement accounts are among the largest assets that are likely to be divided. Florida courts divide retirement benefits based on the cumulative value of each person’s accounts.
These are the main steps for dividing a 401(k) plan or SEP in an equitable manner:
- The couple works with a divorce attorney to file a divorce decree detailing the division of any 401(k) or pension retirement accounts.
- The divorce attorney drafts and submits a QDRO to the court.
- After the court reviews and approves the QDRO, the divorcing couple works with the divorce attorney to decide the next steps.
If both spouses have a 401(k) retirement account, they may keep the accounts intact to avoid property division. A former spouse may choose to keep 100% of the retirement plan but must give an asset of similar value.
Early withdrawal from a 401(k) or SEP plan incurs a 10% tax penalty and potential liability on one’s retirement plan.
How to Avoid Early Withdrawal Penalties When Dividing a 401(k) or SEP
To avoid an early withdrawal penalty when dividing a 401(k) or SEP in a divorce, one must be 59½ and older.
However, the following circumstances can exempt an account holder from tax consequences when withdrawing:
- Terminal illness and disability
- Domestic abuse
- Financial emergency
- National disasters
- Higher education expenses
- First-time homebuyer
- Health insurance (if unemployed)
- Unreimbursed medical expenses
- Birth or adoption
- IRS levy
- Active military reservists
- Equal payments on a periodic basis
Retiring at 55 or older allows penalty-free withdrawals from a 401(k) or 403(b). However, transferring to an individual retirement account forfeits this benefit.
For those 59½ or older, tax-free IRA rollovers are advisable. A QDRO permits a penalty-free lump sum payment before age 59½.
How to Avoid a Taxable Distribution When Dividing a 401(k) or SEP
Avoiding a taxable distribution when dividing a 401(k) or SEP requires a former spouse to request a QDRO from state courts.
A QDRO facilitates the penalty-free transfer of 401(k) or SEP benefits to the other spouse, specifying the settlement amount for plan administrators to verify.
After approval, the beneficiary can do an IRA rollover or receive their retirement benefits in cash.
How are Roth IRAs and Simple IRAs Divided in a Florida Divorce?
Both spouses must first know the date the IRA was opened to divide a Roth or Simple IRA in a divorce. The benefits acquired are not counted if the account was opened before marriage since it will be considered a non-marital asset.
During a divorce in Florida, the value of the account from marriage to separation will be what’s considered marital property — which will be divided equitably unless mitigating factors apply.
The plan owner specifies the transfer amount in the divorce order, and the other spouse can roll over to traditional retirement accounts or cash within 60 days, including possible military retirement benefits.
IRA custodians withhold 20% for taxes. Following the 5-year account rule helps in avoiding early withdrawal fees.
How to Avoid Early Withdrawal Penalties When Dividing a Roth or Simple IRA
To avoid early withdrawal penalties when dividing a Roth or Simple IRA in a divorce, one spouse must have been contributing to the Roth IRA for five or more years. That’s because withdrawing after five years is tax-free.
Withdrawing under age 59½ or with an account of less than five years will incur an early withdrawal 10% tax penalty. Simple IRAs are exempt from the 5-year rule and face the same penalty in these cases.
How to Avoid a Taxable Distribution When Dividing a Roth or Simple IRA
Avoiding a taxable distribution when dividing a Roth or Simple IRA requires a trustee-to-trustee transfer, where an ex-spouse moves the IRA and marital property to the non-employee spouse.
Similarly, only marital property is considered when dividing a defined benefit plan or defined contribution plan.
How are Pensions (Defined Benefit) Plans Divided in a Florida Divorce?
Dividing pension benefits requires a QDRO detailing the amounts categorized into marital and separate property. Pensions are divided by the amount of assets gained during the marriage.
The employed spouse must detail marital property in the QDRO. Funds in the account before marriage are separate property unless addressed in a prenuptial agreement.
The ex-spouse may get a lump sum payment from that particular account.
How is a Pension Plan Valued In a Florida Divorce?
Pensions like government pension plans or military retired pay are considered marital assets. As a defined benefit plan, retirees receive a certain amount which can be divided.
During a divorce in Florida, courts consider these factors to divide pension benefits:
- Length of the marriage
- Contributions of each spouse
- Other financial circumstances
As the biggest asset, family law ensures that both spouses receive appropriate amounts.
How is a 457(b) Plan Divided in a Florida Divorce?
A 457(b) plan is a non-qualified defined contribution plan divided by analyzing all assets’ documents, deciding which are marital assets, and creating a “QDRO-like” orderdetailing the division.
Defined contribution plans cannot use a QDRO. As a government plan, most municipalities are not obligated to accept QDROs for it.
Spouses can establish a non-interest-bearing joint account for divided assets, allowing an ex-spouse to withdraw funds into an individual account.
How is a 457(b) Plan Valued In a Florida Divorce?
A 457(b) plan is for state employees, making it a municipal retirement plan. Since not all municipalities accept a QDRO, consulting with a family law attorney or law firm for spouses to be aware of their options and any potential tax implications.
What Is a Qualified Domestic Relations Order (QDRO)?
A Qualified Domestic Relations Order, or QDRO, is a legal divorce document that simplifies divorce proceedings by specifying the marital properties for division.
A QDRO grants retirement benefits, spousal support, and marital property rights to a beneficiary spouse or dependent.
The beneficiary spouse will pay fees for the QDRO to be drafted. After the court order is approved, the court directs the retirement plan’s administrator to divide retirement benefits into each account.
However, if the QDRO is prepared incorrectly, there will be penalties on the retirement account.
A QDRO only covers qualified plans like the 401(k), not IRAs. Meanwhile, splitting military retired pay benefits requires a Military Pension Division Order (MPDO).
How Much Does a Qualified Domestic Relations Order Cost?
In Florida, a QDRO costs between $500 to $700. This price differs depending on whether a knowledgeable family law attorney or QDRO specialist is hired.
Who Pays for a QDRO in a Florida Divorce
In a Florida divorce, the beneficiary spouse pays for the QDRO since they aim to receive a portion of their ex-spouse’s retirement benefits.
Is a QDRO Needed for an IRA or Roth IRA?
No, a QDRO is not needed for an IRA or Roth IRA. They are only necessary for employer-sponsored plans, not individually-owned plans.
Are Social Security Benefits Divided in a Florida Divorce?
No, Social Security benefits are not divided in a Florida divorce. One spouse may qualify and collect spousal benefits based on the other spouse’s work record, but this does not impact the first spouses benefits. The impact of divorce on social security benefits is very limited.