If Your Case Has an IRA, Watch What Formula Divides It

By Denisa Tova-Liebman

A pension is a promise: a monthly benefit earned through years of service, which is why courts divide it with a coverture fraction. An IRA or a 401(k) is not a promise. It is actual money, contributions, rollovers, withdrawals, fees, and market gains and losses. When a pension formula is applied to that account, the marital and non-marital dollars get blended, and growth on pre-marital money is divided as if it were marital.

Why the formula is the wrong tool

A coverture fraction divides a benefit by time. A defined contribution account has to be divided by tracing dollars, because the separate-property portion and its growth are real, identifiable amounts. Replace that tracing with a fraction and you can move a six-figure sum from one spouse to the other that nobody ordered on purpose.

What a real case looked like

In one appellate decision, a $1 million IRA had more than half of its balance tracing to separate property. Once that separate portion was identified, roughly $250,000 shifted. The remaining balance was then divided with a coverture-style fraction, and nothing in the decision separated the growth on the separate dollars from the growth on the marital dollars. The tracing was done halfway, then a formula finished the job.

Three things to check before judgment

• Identify the account type. A defined contribution account (401(k), 403(b), IRA) is divided by dollars. A defined benefit pension is divided by a coverture fraction. They are not interchangeable.
• Confirm whether pre-marital money exists. If any of the account predates the marriage, the separate portion and its growth have to be traced from the date of marriage forward.
• Make the language divide actual dollars, not a fraction. The order should name the marital amount and its gains and losses, not borrow a pension formula.

Go deeper in the IRA division guide, the forensic tracing guide, and the explainer on gains and losses on separate versus marital dollars.

TOVA is not a law firm and does not give legal or tax advice. Counsel makes the legal calls.