How to Protect Your Retirement After a Divorce

Understand the options and rules when dividing retirement assets

Divorce is never fun. The emotional turmoil that typically comes with it is often exacerbated by financial issues and the battle over the division of assets, such as real estate, physical property, money, and investments.

Retirement plans and pensions are often critical assets targeted by both spouses, mostly when a nonworking spouse doesn’t have any savings. Here’s what you can do to make sure your retirement savings or rights to benefits aren’t lost if you face divorce.

Key Takeaways

  • Retirement plans and pensions are often key assets in a divorce decree.
  • It’s crucial to understand the rules of your retirement plans that govern how assets are divided.
  • Dividing assets in defined contribution plans and individual retirement accounts (IRAs) is relatively straightforward compared to dividing pension benefits.
  • Make sure to stay on top of paperwork and to hire a professional, such as an attorney, to help guide you through the process.

Ways to Protect Your Retirement in a Divorce

The first step in protecting your retirement assets is to know the rules that govern your retirement plans. Most plans and accounts have specific procedures that must be followed when dividing retirement assets in a divorce. Failure to follow these rules may lead to forfeiture of some or all of those assets—even if they were accorded to you in the divorce decree.

For example, the Thrift Savings Plan (TSP)—a defined-contribution plan for federal employees and members of the uniformed services—requires that the division of assets be clearly spelled out and referred to as the TSP balance directly in the divorce decree. A qualified domestic relations order (QDRO), a court order used to divide the assets that are in specific types of retirement plans, including qualified plans such as 401(k)s, does not apply to the TSP.

The divorce decree must say something to the effect of “the spouse is entitled to X percent of the participant’s TSP balance” somewhere in the document or one of its appendices. If it does not, then the participant’s spouse receives nothing, regardless of any other agreement that was made.

The rules pertaining to the division of retirement assets and pensions vary from state to state, so be sure to determine what rules apply in your state and locality. 

How Are Pension Benefits Divided in a Divorce?

The division of assets in a defined contribution plan and individual retirement accounts (IRAs) is usually a relatively straightforward process. Dividing guaranteed pension payouts can be another matter in many cases.

Several key factors enter into how pension benefits are allocated between spouses. Any pension earned while the divorcing spouses were married is typically considered joint property in most states and is subject to some form of division in a divorce. That said, there are several ways that this current or future benefit can be divided.

Most pensions offer some form of survivor’s benefit and, in some cases, the ex-nonworking spouse may opt to retain this benefit. In other cases, the actual monthly benefit is divided between the spouses, and the survivor benefit may be waived, retained, or transferred depending upon the divorce decree.

Another scenario is that the nonworking spouse may come out ahead by waiving the survivor benefit and having the other spouse purchase a life insurance policy naming them as a beneficiary. This can be especially prudent if the survivor benefit will stop if the nonworking spouse remarries before a certain age.

For example, the pension paid to a retired member of the U.S. military has a survivor benefit that will cease if the spouse of the deceased service member remarries before age 55. A spouse who divorces a service member receiving a pension should run the numbers to compare a life insurance death benefit against what they will receive from the survivor benefit if they remarry before age 55.

5 Steps to Take Before Divorce Proceedings

If you get divorced, or are seriously considering it, now is the time to get your ducks in a row about how your retirement assets will be divided. The following steps can help ensure that you either acquire or retain your fair share of retirement plan assets during the divorce proceedings.

1. Do your homework

As mentioned above, those who understand the general rules of how plans are divided are better prepared to assess whether they get or retain what they should. Nonparticipant spouses have the right to obtain complete information about all retirement plan balances or account balances that the other spouse owns. They should be able to get current statements on all assets, retirement or otherwise, that are eligible for division.

Any debt that is owed inside a retirement plan usually is considered to be a joint obligation. For example, if the participant spouse took out a $50,000 loan from their 401(k) plan account with $200,000 in assets, then a 50-50 split would be calculated on the remaining balance unless the divorce decree specifically states that the loan must be repaid before the division.

2. Get professional representation

Even if dividing the rest of your marital assets seems relatively straightforward, it is probably wise to at least consult an attorney to review the division of retirement assets. Divorcing spouses who are uneducated in this matter can both lose in some cases, due to simple ignorance of how pensions and other retirement assets work and which payout options may be the best for both parties even when they are divided.

3. Stay on top of paperwork

Send all court orders and divorce agreement documents to plan and account custodians immediately. If you delay too long in doing this, then you may forfeit what is due to you because your paperwork is outdated and invalid. Although private pension plans are required under the Pension Protection Act of 2006 to accept any court order regardless of when it was issued, it is still critical to submit this paperwork before any of the plan or pension assets are distributed. If you don’t, you may be faced with the prospect of trying to recover those assets yourself, which can incur further legal fees and bureaucratic wrangling.

4. Review Social Security benefits

If you were married to your ex for at least 10 years, then you might be eligible to get a portion of their Social Security benefits. Visit the Social Security website for what you will need to do to collect. If you are entitled to your own benefits as well, then you are usually allowed to receive the larger of either your benefit or your share of your ex-spouse’s payments.

Some couples close to the 10-year mark choose to have a legal separation first, so that they can stay married until they qualify for spousal Social Security benefits. A legal separation has many of the benefits of a divorce and can be a wise interim step that preserves important retirement benefits, especially if one spouse has earned significantly less than the other spouse.

5. Don’t overlook survivorship

If your ex gets a pension that you are dividing, make sure that you are listed as the survivor or beneficiary on the plan so you can continue to collect benefits if they die. Find out which forms you need to sign and keep copies of them in a safe place for future reference.

If your soon-to-be ex-spouse has serious health issues or is terminally ill, be sure to get your legal documents to plan custodians sooner rather than later. Settling the affairs of a deceased ex-spouse who died before this paperwork was submitted can be a real nightmare.

Happily Married? Maybe Plan Ahead Anyway

If you think your relationship can survive a discussion like this, consider talking about how you would divide your assets, should you ever need to. One way to settle these issues is to create a postnuptial agreement. These are enforceable in most places but should be done carefully to fit your state’s laws—and some states may not accept them. Use an attorney to make sure that it works.

If you are still at the planning-to-get-married stage, a prenuptial agreement may be the most straightforward way to protect your retirement assets if you eventually split up. Just be sure to include plans for how these assets can be divided, and leave some room for adjustments that could benefit you both depending upon your circumstances at the time of divorce. Prenups are especially useful if one or both of you has children from a previous marriage or relationship.

How Can I Protect My Retirement Assets in a Divorce?

Understanding the rules regarding the division of assets in your retirement plans is crucial. Different plans and accounts have specific procedures that need to be followed to divide retirement assets in a divorce. Rules vary by state, so you’ll need to understand those, too. It’s a good idea to hire a professional, such as an attorney, to guide you through the process. 

What Steps Should be Taken Prior to a Divorce?

In addition to understanding the rules, make sure to send all court orders and divorce-agreement documents to the custodians of your plans and accounts. If you were married for more than 10 years, check to see if you are eligible for part of your ex-spouse’s Social Security benefits. If you are receiving or will receive pension benefits from your ex, get listed as a survivor or beneficiary to ensure that you can keep collecting them if they die. 

What Is a Qualified Domestic Relations Order (QDRO)?

A qualified domestic relations order (QDRO) is a court order used to divide retirement assets in employer-sponsored plans such as 401(k)s, 403(b)s, or traditional pension plans. A QDRO must comply with the Employee Retirement Income Security Act (ERISA), which governs these type of plans. IRAs are divided using a process known as “transfer incident to divorce,” while the division of assets in the TSP requires a retirement benefits court order (RBCO).

The Bottom Line

Divorce is never a fun process. But knowing the rules and anticipating the impact of retirement plan division and pension payouts can make things a great deal easier for both parties.

Article Sources
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  2. Internal Revenue Service. “Retirement Topics — Death.”

  3. Social Security Administration. “Ex-Spouse Benefits And How They Affect You.”

  4. Thrift Savings Plan. “Divorce, Annulment, and Legal Separation.”

  5. Internal Revenue Service. “Publication 504 (2020), Divorced or Separated Individuals.”