What happens to retirement benefits in a Maryland divorce?

Splitting retirement accounts correctly during a Maryland divorce is key to ensuring equitable distribution and avoiding unnecessary taxes and penalties.

Maryland is an equitable distribution state, which means that couples in Rockville going through a divorce will see property divided on an equitable basis. That does not necessarily mean that assets will be split evenly, but rather according to what is fair.

Retirement benefits are usually eligible for division, though they present potential complications. Understanding what is marital property and what is not will help spouses get a clear picture of what to expect from their retirement accounts.

Marital property in Maryland

Under Maryland law, all marital property, or assets acquired during the marriage, are subject to division at the end of a marriage. Excluded from marital property are the following:

  • Items that a third party gives a spouse as a gift or inheritance
  • Items acquired prior to the marriage
  • Items outlined in a prenuptial agreement

The law also states that any assets that can be directly traced to the above would be considered non-marital property.

Retirement accounts

Any retirement accounts - including pensions, IRAs and 401(k)s - that are acquired during the marriage will be considered marital property. Contributions made to these accounts prior to marriage are considered separate, as is any increase in the value of the account that could be directly traced to those payments.

Maryland law specifically states that a court can transfer ownership of an interest in any profit sharing, retirement or deferred compensation plan to one or both parties. Even if only one spouse contributed to the account, if those contributions were made during marriage, they are eligible for division. Employer matches to those payments are treated similarly.

Valuing retirements accounts

In Maryland, a court has several options for determining the value of a retirement account. One method is to simply determine the employee's contributions and any accrued interest. Another is to take the present value of any future benefits that would be paid after retirement, applicable mostly to pension plans.

Securing a QDRO

In order to receive payments from a spouse's retirement account, the nonemployee spouse must obtain a qualified domestic relations order, or QDRO. This is a court-ordered document needed for pensions and 401(k) plans, but, as Forbes magazine points out, it is not needed for an IRA. Other accounts, such as military pensions, may have specific requirements for division. Abiding by these rules will prevent the payee from having to pay a penalty for the withdrawal.

One final factor that should always come into play when determining the value of a retirement account is the tax that could be involved. For example, failing to split the assets with a QDRO could result in a tax penalty on both the distribution and the receipt of the money. Working with professionals in Maryland can help divorcing spouses avoid paying unnecessary taxes and fees.