Divorce is emotional and can be highly complicated. That’s true when it comes to dividing complex financial assets. Pensions and other retirement accounts are generally considered marital assets in Nevada and are subject to division between spouses.
Nevada is a community property state, meaning spouses divide marital assets equitably. In many cases, they equally share property and debts accrued during the marriage, with some exceptions. Employee-sponsored retirement accounts are usually divided, but the process can be tricky.
Defining retirement assets
Employers commonly offer two types of retirement plans. They are:
- Defined-contribution plans: More popular with private employers for many years, defined-contribution plans are funded mainly by employees, while some companies match a portion of the worker’s contribution. The most common type is a 401k, which the employee manages.
- Defined-benefit plans: Pensions have become a thing of the past for most private employers, but they still exist for military members along with state and federal employees. Employers fund and manage these plans, and workers have little say over investment opportunities.
When couples divorce, they divide only the portion of these retirement assets earned during the marriage’s term.
What is a QDRO?
Once a divorce is finalized, retirement account managers do not automatically divide these funds. Instead, beneficiary spouses must have their lawyer file a qualified domestic relations order or QDRO. This court order directs plan managers to pay a portion of qualified retirement benefits, such as pensions, profit-sharing, 401ks and 403ks, to an “alternate payee.”
Beneficiary ex-spouses can receive a lump sum or roll over their share into an Individual Retirement Account (IRA). Both parties must be aware of potential tax consequences. It’s crucial to understand that “cashing out” any of this money can result in paying income taxes and a 10% penalty if you are under 59 ½ years old. A rollover into a qualified retirement plan avoids taxes and penalties.
Consider alternatives to splitting retirement assets
Sometimes, a “participant” spouse may not want to hand over a significant chunk of their hard-earned retirement nest egg. Instead, they can offer other marital property or a life insurance policy equal to the beneficiary spouse’s share of retirement assets.
Working with an experienced divorce attorney who understands how these complicated assets are valued and divided in Nevada is advisable. With sound legal advice, both parties can emerge from this challenging time on solid financial footing.