Dividing Retirement Assets in Divorce: What You Need to Know

[00:00:00] David Bulitt: Welcome to JGL Law for You. JGL Law for You is a podcast by lawyers, but not for lawyers. Only on JGL Law for You do we discuss a wide array of topics to help you navigate the many legal processes, developments in the law, other current events, and how they may affect you, your family, or your business.

[00:00:20] Today, I have my partner and colleague at Joseph Greenwald and Laake, a specialist in the area of family law. Chris has been working with clients for over 10 years, on all areas of family law cases, and today we’re talking about a particular niche: retirement accounts. Now, most of us, when we think of retirement accounts, we think of, you know, my IRA, what’s in my IRA, what’s in my 401(k) at work. But in fact, there are a lot of different types of accounts, and there are different ways that they’re handled in family law cases, and that’s what we’re here to talk about. Right, Chris?

[00:00:51] Christopher Castellano: That’s right, David. Thank you for having me on again today. It’s an exciting but important topic.

[00:00:56] David Bulitt: Yeah, it’s interesting in the scope of family law. I think when we [00:01:00] talked about this earlier, the place to start, like with most things, is at the beginning. So, tell us a little bit about what different types of retirement assets there are generally, and then we’re going to move to how they can get divided, if at all, in a divorce case.

[00:01:15] Christopher Castellano: Yeah, sure. I mean, there are so many different flavors of retirement benefits. You know, there’s the more common and then the less common, right? And that has changed over time. We’re all familiar with the 401(k) concept, but then there are also other benefit programs, such as a 403(b). You mentioned an IRA. There’s an RIRA, right?

[00:01:38] David Bulitt: A lot of letters, Chris.

[00:01:38] Christopher Castellano: A lot of letters, a lot of acronyms, and it’s all done that way because it’s all part and parcel of the federal tax code and state tax codes because there are tax benefits to each one of these types of retirement accounts. The more traditional account that I think is important to talk about, and there are a few different flavors, is the pension [00:02:00] account.

At least in America, the pension account has waned over time. There are a lot fewer organizations that offer pensions, but they’re certainly still available in government agencies, whether federal, state, or local. And it is certainly a benefit and a retirement asset that comes up quite often in divorce cases.

[00:02:23] David Bulitt: Let me ask you a question, because again, let’s assume that folks are learning this stuff from the very beginning here. Well, isn’t everything kind of a pension? I mean, what’s the difference between a pension, like you call it, and a regular retirement account, a 401(k) or an IRA? What’s the difference?

[00:02:38] Christopher Castellano: So, a lot of people know, or perhaps a lot of people know, what an annuity is, right? A pension is essentially just an annuity. It’s a payment that you receive from your organization after you retire. That is a set amount per month, right? That’s the easiest way to understand it.

So, you know, [00:03:00] you’ve worked at a company for 20 years. After you retire, you’re going to receive a set amount of money per month. Now, there are different options that you can take. For instance, you could cash it out and roll it into a different annuity. You could take a lump sum for it. But what we’re talking about in general terms is your pension is a benefit that you get as a per-month payment.

I like to think of it as similar to the lottery, right? You can either get that lump-sum version, or you can get the annuitized payment.

[00:03:34] David Bulitt: It’s something that you earn. So, it’s something that someone earns during the course of their employment, whether, as you mentioned, with a government entity or military, maybe, or something else. It’s something that’s earned while they’re working there.

[00:03:46] Christopher Castellano: Right, yeah, absolutely. It’s one of the employment benefits that accrues during the process of employment.

[00:03:52] David Bulitt: That’s right. Okay. And just to put a fine point on this sort of comparison to an annuity, [00:04:00] an annuity might be something that you or I just go out and buy as an investment vehicle, right?

[00:04:04] Christopher Castellano: That’s right.

[00:04:04] David Bulitt: The pension is something that your employer is providing to you that has a lot of similarities to the annuity, and it provides the same sort of payout benefits and alternatives that you talked about.

[00:04:16] Christopher Castellano: That’s right. It depends on the various different plans that you’re a part of or the organization. Some people may have to pay into their pension. Some people get it as part of their compensation package, and they don’t have to actually pay into it per month. And it depends on if you can take a lump sum or not. But at its core, yes, it’s an annuitized payment that is based on essentially an actuarial prediction of one’s lifespan.

[00:04:46] David Bulitt: Again, I’m trying to think about if I didn’t know what I know, right, going into a divorce and, you know, we’ve got houses, we’ve got some bank accounts, maybe some stocks or cars or whatever it is. These are things that I have today, right, versus [00:05:00] this pension that you’re talking about, or another type of retirement vehicle, the 401(k), 403(b), IRAs, whatever they may be. But I don’t have them today. So how are they divided? A two-part question is, does it matter when you earn these assets, when you start to acquire or accumulate these assets, and how do you even divide them?

[00:05:20] Christopher Castellano: Yeah, sure. So, the first question I always ask when I talk to a brand-new person, before I’m just trying to understand the lay of the land, right, that question is, what type of retirement are we looking at, right? Okay, let’s just, for argument’s sake, say it’s a 401(k). The next natural question is, when did you acquire that? As you say, like the acquisition.

If it was acquired because I worked at Company A, and that was five years before the marriage, and that 401(k) is just still sitting there, well, that’s going to be a non-marital asset, right? That was acquired prior to the marriage.

So, then the next scenario is, while I was working at [00:06:00] Company A, I’m still there, and I got married, and I started acquiring or getting the benefit of that 401(k) both when I was single, not married, and since I’ve been married, right? So now we’ve got the little bit more complicated scenario where a portion of the 401(k) is non-marital, and a portion of the 401(k) is marital.

Then there’s, let’s be real, the easier scenario, right, which is, I started working at Company A after I got married, and that’s when I started getting the 401(k). The entire 401(k) is marital.

As far as the division of these different accounts goes, with that question in mind of what’s marital and what’s non-marital, you present that to the court to say, alright, this percentage, this quotient of the retirement benefit that we’re talking about, whether it’s a 401(k), 403(b), or IRA, this is marital. So, court, we’re asking you to make a division of this account [00:07:00] on, let’s just assume, a 50-50 basis.

[00:07:04] David Bulitt: So, when you say marital versus non-marital, you mean if I’m your client, and I say to you, “Alright, well, we were married in 1990. I started working at this job in 1985.” I’m dating myself, as you can tell. “So now we’re in 2025. It’s 40 years later. I’ve been working for the same company for 40 years, and I’ve acquired this retirement asset over the 40 years. But some of those years were before my spouse and I were married. So how do you figure out what my spouse’s share might be? Does she get an interest in what I earned before I was married?” That doesn’t seem fair.

[00:07:40] Christopher Castellano: It’s a slightly complicated question, but in general terms, right, if we’re just going to look at the years that are marital and the years that aren’t marital, I think you said five years were not marital. In [00:08:00] this scenario, that would be about 88% of the 401(k), or the benefit, that is marital, acquired entirely during the marriage.

Now, let’s set aside the more complicated questions of, you know, dividend reinvestments, or this, that, and the other, or rollovers. So, pure analysis of how much is marital and how much is not marital, it’s fair to say about 88% would be marital in this scenario.

[00:08:24] David Bulitt: So, my risk in that scenario is that my soon-to-be former spouse has a claim to half of that 88%. Again, excluding these other potential factors that may impact that.

[00:08:32] Christopher Castellano: That’s correct.

[00:08:32] David Bulitt: Okay. Okay. Now, what if we had a prenuptial agreement that said, you know, I keep my retirement, doesn’t matter why? And this now again, you know, let’s keep in mind we were married back in 1985, so it’s 40 years ago, but we had a prenup. And in that prenuptial agreement that we both signed, and we both had lawyers who explained it to us, it said that whatever retirement that I accumulate during our marriage is [00:09:00] mine, regardless of what the law is. Is that something that’s enforceable? I don’t want to get too far into prenups, but I do want to, because that seems important, right?

[00:09:07] Christopher Castellano: Yeah, it’s absolutely important. If you have a solid prenup, as you say, that was properly negotiated, then that prenup is more likely than not going to successfully exclude that retirement account.

[00:09:18] David Bulitt: I don’t want to get too far into the prenuptial agreement discussion. We talked about that before, and I want to have you back to talk about that again. Might my spouse in that circumstance say, well, hold on a second. We got married 40 years ago, and now he’s got $2 million in his retirement account. You telling me I get nothing out of that? I mean, is there some sort of an equitable argument even though there’s a prenup? And again, I’m trying not to go too far down this road, but while we’re talking about it, is that some risk that I have?

[00:09:45] Christopher Castellano: Not to give the lawyer answer, there’s always going to be a risk. That caveat, you know, there’s always a creative argument floating out in the ether somewhere. But generally speaking, I would feel, I like to go based on a [00:10:00] scale of confidence, I would feel pretty darn confident in that scenario that that’s going to be excluded.

[00:10:05] David Bulitt: Alright, so let’s go back to the topic at hand here. We’ve talked about the relative ease in figuring out what’s the marital portion of what we call a defined contribution plan, which is this 401(k), the 403(b), IRAs, and so forth. But tell us a little bit about this defined benefit plan, this pension arena. How do they get divided since there’s not really an amount of money sitting in a bank account today?

[00:10:26] Christopher Castellano: Well, that’s right. So, how they figure out the actual payment to you — there’s a portion of the larger plan, without getting too much into it. There’s a portion of the larger plan that all the employees or the plan participants are entitled to. There are reinvestments of this plan at hedge funds. We don’t have to get into all that, but essentially, they’re going to look at various different factors to determine what your annuity payment’s going to be, right?

They’re looking at your salary, [00:11:00] average salary, and various different plans look at it differently. But commonly, people know about, at least in the federal government, the high three, which is the average of your highest three years of salary. They’ll look at your age, how long you’ve been employed, and then the actuaries, the people behind the scenes, behind the curtains, are going to predict how long is this person going to live, because that’s how much the payment is going to be. That’s when we get into the actuarial aspects of the pensions.

[00:11:32] David Bulitt: Okay, so what you’re talking about is trying to figure out what today’s value of that pension might be, even though it’s going to be paid over a period of years down the road, right?

[00:11:41] Christopher Castellano: Yeah. There are two different options when you’re evaluating a pension plan in the context of a divorce. One is a present value, and then the other is the “if, as, and when” predicted value, right?

The present value — I am sure, David, you do this just as well as [00:12:00] all of us — is that you hire that expert to get into it and figure out what that present value of that pension plan is today and present that to the court.

[00:12:11] David Bulitt: Okay, but wait. So why would a client care about the present value if the client’s spouse isn’t going to be getting that benefit for years down the road? Why does it make any difference? So, if I get my share, don’t I have to wait? Or is there some other way to get relief based on this present value of this pension?

[00:12:30] Christopher Castellano: Well, yeah, there are certainly ways that if you present, if you’ve opted to present a present value determination of the pension, then you can certainly present that to the court. And as long as the assets necessary to what we call horse-trade or set off the values are available, then you can present a creative solution to the court to say, listen, I understand that the pension is worth a total of $300,000. [00:13:00] I’m due $150,000 from that, and you can get it from the cryptocurrency account.

[00:13:04] David Bulitt: So, you might have a client who says, look, I don’t want to wait 10 years, 20 years, whatever it is, to get my money. And so, here’s a pool of assets. I’d rather get my share of what the value is today, today, rather than waiting, right?

[00:13:18] Christopher Castellano: Yeah.

[00:13:20] David Bulitt: Okay. And let’s shift for a second. Now your client says, you know, this is my only retirement, whatever I get from this pension, so I want to keep it as my retirement. Then let’s go back to the same circumstance where a portion of the years that my spouse worked and earned this pension was earned during the [00:14:00] marriage, and a portion was earned before the marriage. How am I getting my money, and how is it determined how I’m going to get my money? So, you’re referring to the plan participant, the employee, who earned it.

[00:14:24] Christopher Castellano: Yeah.

[00:14:24] David Bulitt: I wasn’t clear. Your client is the employee who says to you, you know what, I’m comfortable with what I’m going to get in terms of an asset division, but I don’t have any retirement. What my spouse earned is going to be, whatever I can get from that is going to be my retirement. So, I just want my share as if it were a retirement asset. I don’t want it in cash today. I don’t want a horse trade. So how is it determined what I’m entitled to, and how is it paid to me?

[00:14:39] Christopher Castellano: The benefit plan would be paid once — and let’s set aside yet another caveat of separate interest versus shared interest for pensions. So, let’s assume that we’re talking about a shared interest, right? Shared interest means that once the plan participant receives, once they receive their benefit payment on that [00:15:00] per-month basis from the plan administrator, then a portion of that is also going to go to the alternate payee, the spouse, right, the former spouse.

So yes, you’ve got to wait. It could be five years; it could be 10 years. But once that pension goes into pay status, you’re going to receive your portion of that pension payment.

Now, how the amount is determined is going to be based on — if it’s a shared interest — the plan participant’s life and factors. We talked about those: salary, age, years of service, actuarial factors. It’s going to be based on how much of the pension was acquired during the marriage, right? So, if all of it was acquired during the marriage, and there’s no equitable division that varies from the 50-50, then half of that pension payment, less any necessary fees, would go to the alternate payee or the former spouse.

I don’t know if you want to [00:16:00] get into separate interest, but just very briefly, if that’s an availability for the plan in question, and that’s a big if, but some of the larger Fortune 50 companies certainly offer separate interests in the pension.

[00:16:27] David Bulitt: David, when it comes to a separate interest, and that’s assuming that the plan allows for a separate interest, but certainly a lot of Fortune 50 and the larger companies, if they offer a pension plan, they offer what’s called a separate interest. And what that means is you segregate out the portion of the pension benefit plan that would go to the plan participant for the benefit of the alternate payee, the former spouse. The former spouse then becomes their own actuarial factor, right?

So, you’re going to look at that individual’s age, and depending on the plan, there are certainly some — I don’t want to say strategy, that may oversell it — but strategies that you can employ from a financial perspective. You know, should we take a separate interest or should we take a shared interest in this plan? But that’s a [00:17:00] bit more of a specific discussion.

[00:17:21] David Bulitt: I don’t want to drill too far down, but when you say a separate interest, does that mean that my spouse would then have their own separate pension apart from mine?

[00:17:31] Christopher Castellano: Essentially, right. So, the employee’s pension that was acquired during the marriage is now divided in whatever that percentage of division was, right? Let’s just make it easy. It’s divided in half. And so now the pension plan sees the alternate payee spouse as a distinct recipient of that pension. So essentially what happens is that the pension plan divides the pension into [00:18:00] two parts: the actual plan participant’s pension, and then the alternate payee or former spouse’s portion, which becomes its own distinct pension within that umbrella.

[00:18:10] David Bulitt: Alright, so let’s get off the separate plans for a moment and go back to the shared interest, right? So here I am, your client again. I want to wait to get my benefit when my spouse retires. But what happens if my spouse dies, either before I start to acquire my share of the pension, or during the course of the time that I’m acquiring my pension? You know, I don’t like him very much, but I still don’t want him to get hit by a bus. But you know, that happens. He’s gone. Do I lose my benefit in the shared interest world?

[00:18:41] Christopher Castellano: The answer is, anticlimactically, yes, you would. You would lose that benefit. Now, there’s another subset within the pension plan, right, and that’s called a survivor benefit annuity. The survivor benefit annuity, the best way to think of it is [00:19:00] essentially an insurance policy on the plan participant, the person receiving the pension benefit.

That person would pay a certain amount of their monthly benefit towards this quote-unquote insurance policy so that if the plan participant in a shared interest world predeceases the alternate payee, then a portion of the pension benefit will still go to the alternate payee.

[00:19:26] David Bulitt: So, if I pay for this survivor benefit annuity out of my share of the benefit that I’m entitled to, then if my spouse predeceases me, it’s almost like, as you said, an insurance policy. So, I would still get my benefit, even though I might live an extra 10 or 15 years, whatever it might be, after the death of my former spouse.

[00:19:44] Christopher Castellano: That’s right. So, it comes at a cost, but that’s with anything, right? There is a reward to the risk that’s employed. Now, I should say this much, to go back to the separate interest, it’s a wholly less relevant conversation [00:20:00] to have relative to the survivor benefit if it’s a separate interest, right? Because the benefit of separate interest is essentially building in that concept that even if the plan participant predeceases you, you’re still getting your distinct payment.

[00:20:13] David Bulitt: So, Chris, now let me ask you another question entirely. We’ve been talking about the former spouse getting essentially 50% of their share of the marital portion of this retirement asset, whatever type of retirement vehicle it is. Are there any factors that might affect whether or not the former spouse gets more or less than that 50% share?

[00:20:35] Christopher Castellano: Well, certainly. In Maryland, we’re an equitable division state, which means that when you get to court, the court’s going to weigh the equities between the parties, right? There are various different factors that could impact those equities and make the judge at the time say, you know what, I’m going to deviate from what would be the ordinary 50-50 division and say maybe it’s 55-45, maybe it’s something different from that.

And those factors could include the length of the marriage, the health or age of the parties involved, [00:21:00] certainly the contributions by either party to the marriage, and what led to the estrangement of the marriage, what led to the breakdown of the marriage. And oftentimes that could lead to an alteration or deviation from that normal 50-50.

[00:21:28] David Bulitt: Okay. So there might be other factors in Maryland, as you mentioned, a few of them, that might affect the general, just drawing a line down the middle of the page, and everybody gets half.

Okay. So now we’ve gotten past the point that I’m going to get my share of this retirement asset, whatever it is. What happens? Does there have to be anything in writing, or is it part of the divorce decree, or is there something else that needs to be done in order for me to make sure that I get my money that I’m entitled to?

[00:21:55] Christopher Castellano: For the purposes of this conversation, let’s set aside an IRA. And I’ll just say [00:22:00] briefly, for an IRA, all you need is a form that’s usually found within the plan documents or on the website for your IRA, and you can do a transfer of assets.

Okay, so let’s set that aside for a moment. For your 401(k)s, your 403(b)s, your pension plans, all the quote-unquote traditional retirement vehicles, you would need what’s called an eligible domestic relations order, right? Oftentimes, these are referred to as qualified domestic relations orders. The federal government has their own spin on what they call them, but generally speaking, it’s a court order that mandates the plan administrator to divide the pension or the 401(k), or whatever the retirement benefit is, according to the court’s order, right?

[00:22:48] And that, whether it’s 50-50, 45-55, whatever it may be, as well as the survivor benefit to the extent that that was an option, right? So, it’s a court order that mandates how [00:23:00] the retirement is divided.

[00:23:01] David Bulitt: Okay. And just for a second, to go back to the traditional IRA, we fill out the forms. Do I pay taxes on that money when it goes from my spouse’s account into my account?

[00:23:12] Christopher Castellano: Yeah. So even with a QDRO or EDRO that transfers, let’s say, a 401(k), part of that could be a lump-sum transfer, whatever it may be. A transfer from one party to the other, whether it’s an IRA or 401(k) or what have you, is a tax-free transfer. It’s called a transfer of assets incident to divorce. It’s in the IRS regulations.

[00:23:38] David Bulitt: So, if we’re splitting an IRA and I’m getting, pick any number, $100,000 from my spouse’s IRA that’s being rolled into mine, I don’t have to pay taxes on that when the transfer happens?

[00:23:46] Christopher Castellano: That’s correct.

[00:23:46] David Bulitt: Okay. And what about when I start to get my benefit? Let’s shift back over to now, we’re in a pension arena, and now my spouse is retired and, I’m getting [00:24:00] my share of my portion of the benefit each month. When I get those checks, do I pay taxes on those checks?

[00:24:06] Christopher Castellano: Well, certainly it’s going to be treated as normal income. Depending on how it’s being paid, you’re going to get the normal deductions that you would for any other form of payment.

[00:24:18] David Bulitt: So, to sort of bring things to a head, wrap things up a little bit, what would you say to folks who are looking at divorce and where retirement assets might be at issue? What’s the best way to get there? What’s the best way to find out more information?

[00:24:33] Christopher Castellano: Yeah, I mean, as I think you and I have had quite a few conversations now, one of the recurring themes, and generally what I recommend to people, is do the homework. Do the homework proactively, right? Get your affairs in line. Understand your budget. Outline what your assets are when it comes to retirement benefits. Outline exactly what you have, what you believe to be non-marital, and for the sake of [00:25:00] everyone involved, track down the documentation of these accounts.

The older the claim for a non-marital portion of the asset, the harder it is to get those documents. So, the sooner you start trying, the better it is going to be for you, right? But it’s really to do that proactive homework.

The next step, in my humble opinion, is to talk to somebody, a professional, about how to deal with these retirement benefits. Oftentimes, the retirement benefits are the largest asset in a marriage. A lot of people think it could be the home, it could be the collector car, whatever it may be. But generally speaking, it’s going to be the retirement benefits. And so, this should be a significant focus of your case.

So, talking to somebody that has experience with various different pension plans, 401(k)s, federal retirement benefits, and particularly military benefits is important, and it’s certainly recommended.

[00:25:59] David Bulitt: Yeah, this is clearly a [00:26:00] little more complicated than how we’re splitting up the furniture and how we’re splitting up our cars. So, if folks out there, don’t do this on your own. Obviously, what you’re hearing from Chris, and that’s 100% correct, don’t try to figure this out on your own.

And Chris, if people are listening and want to get ahold of you, what’s the best way to do it?

[00:26:18] Christopher Castellano: Yeah, they can call me directly at 240-399-7881. Joseph Greenwald and Lake, based in Rockville, Maryland, and I’d be happy to talk about any and all retirement benefits issues that you have.

[00:26:34] David Bulitt: Thanks so much, Chris, for sharing a wealth of knowledge, at least a portion of your wealth of knowledge, today. Folks, I hope you enjoyed this and got some information. Please join us next time. This is JGL Law for You.