During most divorce proceedings, parties have to divide retirement benefits as well. There are essentially 2 types of retirement benefits: 1) defined contribution plans, and 2) defined benefit plans. A defined contribution plan is the most common type of retirement plan today. This is a plan in which an individual contributes money to an account, which can be matched by an employer, and the money is invested in securities, such as stock, bonds, and mutual funds. Some common defined contribution plans are 401(k)s and IRAs. Defined contribution plans can be funded with pre-tax or post-tax money. If funded with pre-tax money, the contributions are not included in federal taxable income when the contributions are made, but the withdrawals are taxed when the money is taken out of the account. If funded with post-tax money, known as a “Roth” account, the contributions are not tax deductible but the money can be withdrawn tax free. It is also important to note that, subject to some exceptions, any money withdrawn before the participant reaches age 59 and ½ is subject to a 10% early withdrawal penalty.
The other general type of retirement benefits are known as defined benefit plans. These are sometimes generally referred to as pensions and are becoming less prevalent. In a defined benefit plan, money is contributed to an account, which generates interest over time. At retirement age, the account is converted to a fixed monthly payment, which pays an income stream over a period of time, usually for the remainder of the participant’s life. Defined benefit plans may also provide a survivor annuity, which allows the payments to be continued to be paid to a named beneficiary if the participant predeceases the designated survivor. Most pensions today are typically owned by workers in the public sector, such as teachers, government employees, or members of the military.
If you have a question regarding a divorce or family law issue, contact one of the experienced attorneys at Trinity Law today at 717-843-8046 or at www.TrinityLaw.com. Our attorneys routinely handle Pennsylvania family law matters in York, Lancaster, and surrounding counties.