As a companion to my previous blog explaining some of the significant components of community property laws and how they are generally applied in New Mexico, this blog is a deeper dive into understanding how community property laws in New Mexico apply specifically to retirement accounts in the case of divorce. I suggest reading or re-reading my previous blog on community property, as it contains some foundational concepts that are not included here but may be useful for the reader.
To schedule a consultation with our team for your property division case, contact us online or via phone at (505) 544-5126.
What Should I Know About Property Division in NM?
If you do not know the difference between a "Defined Benefit Plan" and a "Defined Contribution Plan," or you're not clear on the difference between a 401(k) and 403(b) or exactly what "Roth" means when describing an IRA, or the difference between an IRA and a pension, you are not alone, and you should still be fine as long as you are getting, and following, good advice from professionals you trust. These professionals not only have a business interest in your success, i.e., but they also want to develop a positive reputation among colleagues. They also have a fiduciary obligation to protect your interests.
In the case of dividing retirement accounts in divorce, such accounts typically represent a significant percentage or even the majority of the entire Marital Estate. So, when dividing these assets, you need to make it your business to understand the kind of accounts there are, how to calculate the community property portion of the account and how to get the accounts divided correctly.
Like so many other topics in family law, we start with some broad and general concepts and then ultimately make a plan based on how these rules and concepts apply to your specific set of factors.
As noted above, there are two basic types of retirement accounts: IRA's and Pensions.
The Difference Between IRAs and Pensions in Divorce
IRA stands for "individual retirement account," and these are typically any type of 401 accounts. This money is invested into mutual funds by the fund manager and used to purchase stock. IRAs are almost universally offered as a benefit from full-time employers as well, and employers are allowed to match employee 401 contributions up to a certain percentage. Think of an IRA as being like a bank account that plays in the stock market. There is some baseline value that increases and decreases with stock market forces and contributions. Also, like a bank account, there are deposits going into it from your income and from any employer match. However, these accounts are also pre-tax exempt, so they have strings attached to them, as described further below.
The federal government is a pretty sizeable employer in New Mexico. Federal employees typically have the option to participate in a Thrift Savings Plan (TSP), which is the federal government's version of an IRA for its employees. Because federal employees have been offered a few options through the years to roll their TSAs into other plans, we occasionally have clients in this situation.
One similarity between a bank account and an IRA is that you can log on to either account and find out its real-time value at any given time. Unlike a bank account, however, you cannot easily access the money in the account if you have not reached retirement eligibility, and you face substantial fees in addition to the taxes you didn't pay when you initially earned the money as income. The rule of thumb is that it will cost 20% of what you take out. The idea behind IRAs is that you don't have to pay tax on the income that you invest in the account when you are young and initially earn it, but you will pay income taxes on it once you start drawing from it after retirement. Answers often lead to more questions, so please call and schedule a consultation with one of our attorneys if you have specific questions about your particular IRA in your particular situation.
Pensions may end up going the way of the dinosaur, but they have not done so yet. We continue to see them in the form of the Public Employees Retirement Association (PERA) accounts for New Mexico State employees. The Federal Employees Retirement System (FERS) accounts for federal employees, not to mention military retirements. So while most private employers offer only IRA options and no pension, pensions are common enough to be relevant.
If an IRA is like a bank account, a pension is more like a promise of money later when you retire. Employees generally contribute money to employer-provided pensions in addition to their years of loyal service, but pensions are also heavily funded by the employer. Unlike a 401(k) account, you do not receive account statements for pensions. Still, participants will receive periodic (or upon request) account summaries of benefits that calculate what you would receive as a monthly benefit if you retired today, and what you can expect when you reach retirement age. Still, there is no account to log on to determine its value today, which makes it distinct from an IRA when being divided in a divorce. The value of any community interest in a pension needs to be identified in some way or agreed upon between the parties for it to be equitably allocated under New Mexico law.
Don't hesitate to contact our office if you have questions about how to identify the community property interest in someone's pension.
How Are IRAs Divided During Divorce?
As noted in other blogs on community property, the critical dates to the division of an IRA are:
- The date of marriage.
- The date the Petition for Dissolution of Marriage was filed.
- The date the divorce is final.
Remember that community property is only acquired during the time period between #1 and #3. So, anything that was in the IRA before the marriage and anything contributed after the date of divorce is the separate property of the party that owns the account.
So, if you had $50,000.00 in your 401(k) the day before your wedding, and then by the time of your divorce, there is $150,000.00 in the account, then the $50,000.00 that was in there before the marriage is yours, and you do not have to share it with your spouse. However, you will need to split the remaining $100,000.00 equally with your spouse as that value was realized during the marriage and is, therefore, community property. Likewise, if you started contributing to the account after the date of your marriage, whatever is in the account on the date of divorce is 100% community property because whatever the value is, was achieved during the marriage.
The formula for calculating the community property interest in a mixed asset that may be both community and separate property is called the coverture formula. It is described as "years of marriage during qualifying service over total years of qualifying service." This ratio gives you a percentage. So, for instance, if you worked for an employer for a total of 20 years, but you were only married for 10 of them, the ratio would be 10/20, or 50% of the value is community. So, if this 10/20 ratio were applied to an IRA worth $100,00.00, then the owner of the account would be entitled to half of it as separate property ($50,000.00), and the other $50,000.00 would be split equally ($25,000.00 each), so you would get $75,000.00, and your spouse would get $25,000.00.
The secret for dividing retirement accounts is determining which portion of it is community property and dividing that amount in half. With an IRA like a 401 (k), this is reflected in the appropriate order as either a specific dollar amount or an exact percentage on a certain date. Because 401(k) 's are invested in the market, their values can and do change daily, so it is necessary to identify very specifically define each party's interest in dividing this asset.
In the case of a New Mexico divorce, when dividing pre-tax-exempt IRA's, once the spouse's respective ownership interests are established (by reaching an out of court settlement or after a trial), federal law allows for a one-time transfer from such a qualifying account into another qualifying account established for that purpose, and receiving spouse will then have all control over and access to the account, including any changes to fund allocations or taking distributions or loans, where applicable. This means that the spouse receiving from the other's account gets the entire awarded amount with no taxes or penalties associated with an early distribution from that type of pre-tax exempt account, as long as they put it directly into another similar account in its entirety. If the receiving spouse elects to "cash out" their portion, then that spouse will be solely responsible for associated taxes and penalties. Also, that asset may be offsetting something besides another retirement account on the Assets and Liabilities Spreadsheet (link to the previous blog on community property), so you need to be sure of not only what you are bargaining for but how it really fits into the marital estate you're dividing. You don't want to find yourself "cash poor" if you can help it.
How Are Pensions Divided in New Mexico?
Pensions are similar to IRAs in that the key is still determining the community property interest in the benefit if it is not 100%. And like IRA's, if the earning spouses' eligibility for the pension began after the date of marriage, then the entire pension benefit up to the date of divorce is community property and will be divided equally under New Mexico Law. However, suppose the pension benefit is not 100% community property. In that case, the coverture formula is applied to determine the community property portion, and each spouse is entitled to half of that portion of the benefit.
Unlike IRA's, pensions are funded by some combination of the employer and employee, so in the first place, actually receiving the benefit depends on retiring from that employment. However, suppose retirement is several years down the road. In that case, a pension cannot easily be divided today because its value to the community is so difficult to determine, and the benefit will be impacted if the employee changes employers after the divorce.
The community has an interest if contributions to the plan were made during the marriage, but determining the present-day value of future benefit Parties have spent considerable resources employing forensic accountants and other forms of experts to divine various calculi for determining such values based on historical financial data and actuarial assumptions, but in this lawyer's humble opinion, its voodoo. Pensions can really only be divided prospectively and based on the coverture formula, which should be applied to the gross benefit once the earning spouse becomes eligible to receive it. This is because what you are really dividing is a promise for a future monthly payment that is subject to several unknowable factors and has no determinable value until the payments begin.
If you are not yet retired, you will also need professional guidance regarding your Survivor Annuity Benefit options because these options are chosen upon retirement and cannot later be changed.
The form of Order for dividing a pension is the Qualified Domestic Relations Order ("QDRO"), and it is a word that comes up in divorce a lot. If you are looking at a divorce and there are retirement accounts to divide, you will hear this word if you haven't already.
CAUTION!! – One inherent problem with QDRO's is that if they are done wrong, you won't know it for several years or maybe even decades until it's time to retire, and then a problem that has lain dormant and unknown for so long suddenly becomes a crisis. Or worse, you got divorced way back then, but the QDRO's were never done in the first place. Unfortunately, it happens, so you owe it to yourself to make sure these matters are handled correctly in the first place.
CAUTION II The Sequel: RUGGLES – Maybe you've heard of the obstinate spouse who decides that they would rather work until their dying day than sharing their retirement with the other. New Mexico courts have dealt with this issue in the case of Ruggles v. Ruggles, which stands for the proposition that you are in control of an asset that belongs to your now-former spouse in the form of their interest in your pension. As soon as you are eligible to retire, they are entitled to their portion that has been held all this time in abeyance. If you choose to continue working beyond your eligibility to retire, then you must directly pay your former spouse what they would have received upon your retirement had you chosen to do so. The proper Orders will go into effect when you actually retire, but if you keep working and skip this step, there's a risk that you could owe your former spouse retroactively to your retirement eligibility as well.
If you've gotten this far into this blog, you probably have serious reasons for needing to gather this type of information. You are looking at a big change coming in your life, and you need to know that you will not be taken advantage of, and the reason you have retirement accounts to divide is because planning for the future is important to you. You need to seek good advice you can rely on before committing to a course of action.
You don't need to understand the differences between various forms of retirement accounts, the intricacies of New Mexico community property law, or the characterization of property matters when working with professionals you trust. As stated above, answers often lead to more questions, and every family is unique. So do not hesitate to schedule a consultation with one of our attorneys to discuss how we can assist you in your unique situation by contacting us online or giving us a call at (505) 544-5126.
COMING SOON - UNDERSTANDING COMMUNITY PROPERTY IN NEW MEXICO III – MILITARY RETIREMENTS