New Mexico is a community property state, which means that all of the property acquired by a couple during their marriage, or earned by either spouse, during the marriage is considered equally owned by both spouses. Accrued or vested retirement account benefits are considered community property, which means that, upon divorce, each spouse is entitled to one-half (1/2) of the retirement benefits earned or accrued during the marriage.
There are two primary types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises a specific monthly benefit at retirement. In a defined contribution plan you (and possibly your employer) contribute a set amount into the account, which may be invested by the employee, the employer or the company that manages the account. Thus, the value of the account will fluctuate depending upon the success of the investments.
An Individual Retirement Account (IRA) is a defined contribution plan, usually an account with a bank or other financial institution. While an IRA is a retirement account, you may be able to access the funds prior to retirement, albeit with a penalty. IRA assets may be divided in a divorce decree and can generally be split in half, with equal shares going to each spouse.
A 401(k) plan is another form of defined contribution plan administered by an employer that an employee contributes to out of each paycheck. Employers can elect to match employee contributions, up to a certain point. There are special rules governing a 401(k) plan, including a limit of $15,000 per year in contributions. Like an IRA, you may be able to access the funds in your 401(k) account prior to retirement, but you will incur both tax liabilities and penalties for doing so. Also similar to an IRA, a 401(k) plan‘s assets can be equally split among the divorcing parties.
A 403(b) plan is a defined contribution plan, similar to a 401(k) plan, that is available only through certain employers, including governments, public education organizations, non-profits, cooperative health service organizations and self-employed ministers. A 403(b) plan will allow you to contribute up to $17,000 per year, more money than a 401(k). However, your investment choices are generally limited and expensive. In addition, often 403(b) plans restrict how frequently you can change your investments.
In contrast, a pension plan is a defined benefit plan administered by an employer where a set amount is awarded to an employee at retirement age, usually paid monthly. Pensions may be divided equally between the spouses. However, because pension plans are defined benefit plans, it can be very difficult to determine their value before they are paid out. Pensions are very expensive for employers to maintain in the long run, so they are becoming less and less common with more employers offering defined contributions plans or not offering retirement at all.
Some smaller employers may use simplified employee pension plans (SEPs). Under a SEP, the employee sets up an IRA and the employer can contribute up to 25% of the employee‘s pay, up to a maximum of $40,000 per year. Smaller employers can also set up SIMPLE IRA plans, which are sponsored by the employer and allow employees to contribute up to $10,000 per year with a voluntary employer matching contribution. In both cases, the plans are divisible in divorce as community property.
It is important to note that, while equally dividing a retirement account is an option, it is not the only way to apportion retirement assets in a divorce. You may opt to try to keep your retirement account whole, and offer your spouse other community property of comparable value instead. Given that retirement plans are often the most valuable community asset owned by a couple, it is essential that parties with substantial retirement assets consult with a family law attorney in order to ensure that the assets are being accurately valued and fairly divided.
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