Dividing Retirement Assets on Divorce

The Federal government wants everyone to save money for old age, and so makes it easy for people to put money away through a wide variety of tax–deferred schemes – among others, defined benefit pensions, 401(k)s for workers in private employment, 403(b) plans for employees of non-profits, and IRAs for those who set up their own plans. The general idea is that taxpayers can defer their obligation to pay income tax on allowable contributions to retirement plans until they retire (when their tax rate will presumably be lower) and then pay tax on any deferred amounts and on the earnings on those saved amounts or on pensions, as they receive the income. In Massachusetts, retirement benefits are usually treated as marital assets and are divided as part of the marital estate on divorce. 

The Feds also make it very hard for people to take money out of retirement plans before they retire (or at least, reach age 59-1/2). ERISA (§206(d), 29 USC §1056(d)(1) and its regulations (26 C.F.R. §1.401(a)-13(b) and the Internal Revenue Code (26 USC §401(a)(13)) forbid assignment, anticipation, alienation, attachment, garnishment, levy, execution or other legal or equitable processes to transfer taxqualified assets. Having forbidden alienation in most situations, the government has also created an exception - a special “tool” called a Qualified Domestic Relations Order (QDRO) that allows divorcing parties to transfer tax-qualified retirement assets from one party to the other. Massachusetts law has parallel restrictions on alienation of retirement plans and similar exceptions for court-ordered transfers on divorce (see, M.G.L. c. 235, Section 35A; M.G. L. c. 32, §19).

Read more in the Fall 2011 edition of the Family Law Section newsletter.