Retirement plans accumulated during the marriage are considered marital assets and are subject to division between spouses upon divorce. In addition, the increase in value of retirement plans acquired before marriage are also marital assets.
There are two types of retirement plans: Employer Sponsored Plans and Individual Retirement Plans. Employer Sponsored plans are further divided into two types of plans: Defined Benefit Plans and Defined Contribution Plans.
- Defined Benefit Plans:
These plans are also known as “Pension Plans” and are generally funded by a participant’s employer, but some plans require participants to contribute as well. The funds in the plan grow tax-free and upon the participant’s retirement, the participant will receive a monthly benefit that is calculated by a formula based on the individual’s past earnings, tenure and age of the participant. The monthly benefits may be taxable.
Defined Contribution Plans:
These plans are funded by direct contributions from the participant and are sometimes matched by the employer. The following are brief overviews of the most common Defined Contribution Plans:
- Traditional 401(k): These plans allow a participant to contribute pretax dollars, subject to annual limits, into an investment fund that will grow tax-free. A participant may withdraw funds at anytime, but most distributions prior to age 59 1/2 will incur a substantial penalty. Upon reaching 70 1/2, the participant is required to start taking distributions based on a formula provided by the IRS. All distributions from a Traditional 401(k) are taxed as ordinary income.
- Roth 401(k): Unlike a Traditional 401(k), contributions to a Roth 401(k) are made with after-tax dollars and all distributions are received tax-free. However, any distributions prior to age 59 1/2 will still incur a substantial penalty. In addition, unlike a Traditional 401(k) the participant is not required to start taking distributions when they attain age 70 1/2.
- 403(b) – These plans are similar to a Traditional 401(k), but are only offered to employees of public schools, employees of certain tax-exempt organizations and certain ministers.
- 457 – These plans are offered to employees of state and local governments and some tax-exempt organizations. Participants defer a portion of their salary into the plan and the contributions and earnings are not taxed until distributed from the plan. A participant is able to withdraw once they are no longer employed. Unlike the plans described above, there is no penalty for withdrawals prior to age 59 1/2.
The below plans are plans that an individual can open on their own whether or not they participate in an employer sponsored plan.
- Traditional Individual Retirement Account (“IRA”) – These plans allow an individual to contribute funds, subject to annual limits, into a tax-deferred retirement account. Contributions may be tax-deductible, but the deduction may be limited if the individual or the individual’s spouse is covered by a retirement plan from an employer or the individual’s income exceeds certain levels. One example is gold or coin IRAs, which you can get from companies like Lear Capital. These companies administrate the IRA for their clients. A review of Lear Capital can be found here: https://www.retirementliving.com/reviews/lear-capital-review. Similar to a Traditional 401(k), an individual may withdraw funds at anytime, but most distributions prior to age 59 1/2 will incur a substantial penalty. Upon reaching 70 1/2, the participant is required to start taking distributions based on a formula provided the IRS. All distributions from a Traditional IRA are taxed as ordinary income.
- Roth IRA- These plans are similar to Traditional IRAs however, contributions to these plans are not tax deductible and once an individual has income above a certain threshold, the individual’s permitted contribution will be reduced. When it comes to choosing the right retirement account for you, this IRA contribution calculator can help walk you through all you need to know to get up to speed and make an informed decision – https://www.sofi.com/roth-ira-calculator/. Similar to a Roth 401(k), all distributions are received tax-free and most distributions prior to age 59 1/2 will incur a penalty. Also, an individual is not required to start taking withdrawals upon attaining age 70 1/2.