Divorce can be one of the hardest and ugliest things to deal with in your life. The emotional and familial turmoil that typically surrounds this process is often exacerbated by financial issues and the battle over division of assets. Retirement plans and pensions are often a key asset that is targeted by both spouses, especially when a nonworking spouse may be left without savings of any kind if he or she is unable to get anything from the former partner. Here’s what you can do to protect your retirement savings or rights to benefits if you face this unfortunate dilemma. (For more, see: Get Through Divorce with Your Finances Intact.)
Know the Rules
The first step in protecting your retirement assets is to know the rules that govern your plans, accounts and pension payments. Most plans and accounts have specific procedures that must be obeyed when it comes to dividing retirement assets, and failure to follow these instructions may lead to forfeiture of some or all of those assets — even if they were accorded to you in the divorce decree. (For more, see: Pitfalls of Getting Divorced After 50). For example, the Thrift Savings Plan, a defined-contribution plan for federal employees and members of the uniformed services, requires that the division of plan assets be clearly spelled out and referred to as the TSP balance directly in the divorce decree. A verbal agreement between the parting spouses will not suffice to process a rollover under the Qualified Domestic Relations Order (QDRO) rules. The decree itself 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, the spouse of the participant will receive nothing, regardless of any other agreement that was made. (For more, see: Is a TSP a Qualified Retirement Plan?)
Any debt that is owed inside a retirement plan also usually is considered to be a joint obligation. For example, if the participant spouse took out a $50,000 loan from his $200,000 401(k) plan, then a 50-50 split may be calculated on the remaining balance in the plan, unless the divorce decree specifically states that the loan must be repaid before the division. (For more, see: 401(k) Loans Pros and Cons.)
Bureaucratically speaking, dividing IRAs and defined contribution plans is usually a relatively straightforward process. Either the divorce decree itself or a QDRO is used to move account balances from one spouse to the other in the form of a rollover. Dividing guaranteed pension payouts can be another matter in many cases. Although both types of retirement funds must usually be divivied up at the time of divorce by some form of court order, there are several key factors that enter into how monthly benefits are allocated between spouses. Any pension that was earned while the divorcing spouses were married is typically considered to be joint property in most states and therefore subject to some form of division in a divorce. That said, there are several ways that this current or future payout can be divided. (For more, see: 3 Life Events That Can Ruin Retirement Plans.)
Most pensions offer some form of survivor benefit, and in some cases the ex-nonworking spouse may simply 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. In some cases, the nonworking spouse may come out ahead by waiving the survivor benefit and having the other spouse purchase a life insurance policy naming him/her as a beneficiary. This can be especially prudent if the survivor benefit will stop if the nonworking spouse remarries before a certain age. (For more, see: Divorce Over 50: Seven Mistakes to Avoid.)
For example, the pension that is 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. Therefore a spouse who is divorcing a service member who will receive a pension should run the numbers to compare a life insurance death benefit against what they will receive from the survivor benefit plan if they remarry before age 55 (which is, of course, rather likely in most cases). (For related reading, see: Say 'I Do' to Financial Compatibility.)
What You Need to Do
If you are either getting divorced or are seriously contemplating doing so, now is the time to get your ducks in a row regarding the division of retirement assets. The following steps can help to ensure that you either get or retain your fair share of retirement plan assets during the divorce proceedings.
- Do Your Homework – As mentioned previously, those who understand the general rules of how plans are divided will be much better able to assess whether they are getting or retaining what they should. If the divorce decree states that a plan or account is to be split evenly, then a rollover order for the entire amount is obviously not correct. Non-participant or non-owner spouses have the right to obtain complete information about all retirement plan or account balances that are owned by the other spouse and should be able to get current statements on all assets, retirement or otherwise that are eligible for division. You also need to be aware that many rules and laws pertaining to the division of pension and retirement assets vary from one state to another, so be sure to find out what rules apply in your state and locality. (For more, see: State Laws Dictate Division of Joint Property.)
- Get professional representation – Even if dividing the rest of your marital assets looks to be relatively straightforward, it is probably wise in most cases to at least consult a pension lawyer in order 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 work and which payout options may be the best for both parties even when they are divided.
- Send all court orders and divorce agreement documents to plan and account custodians immediately – If you delay too long in doing this, you may forfeit what is due to you because your paperwork has become outdated and therefore 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 assets in the plan or pension have been 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. Also, 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. (For more, see: The Pension Bill: A Wolf in Sheep's Clothing.)
- Review Social Security benefits – If you were married to your ex for at least 10 years, you may be eligible for a portion of his or her 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, you are usually allowed to receive the larger of either your benefit or your share of your ex-spouse’s payments. (For more, see: Types of Social Security Benefits.)
- Be sure that you are specified as the survivor – If your ex is getting a pension that you are dividing, make certain that you are listed as the survivor or beneficiary on the plan if you intend to continue collecting benefits after he or she is gone. Find out what forms you need to sign and keep copies of them in a safe place for future reference.
- Create a prenuptial agreement – This may be the most straightforward way to protect your retirement assets and interests if you split up. Just be sure to include plans for how pensions and other assets can be divided, and perhaps leave some room for certain adjustments that could benefit you both depending upon your circumstances at the time of divorce. (For more, see: Marriage, Divorce and the Dotted Line.)
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. If you have questions about what you need to be doing to make sure your assets are distributed correctly, visit the Pension Rights Center website or consult your financial advisor. (For more, see: Divorcing? The Right Way to Split Retirement Plans.)