Divorce can take a substantial emotional toll, but it can also have a lasting impact on your financial status. Separating your assets from those of your spouse can be particularly tricky if your pension plan is at stake. Typically, a pension earned by one spouse is considered a joint asset of both, which means it's subject to division in divorce.

If a marital split is in the works, here's what you can do to shield your pension benefits as much as possible.

Key Takeaways

  • Review your state's laws to determine the best way to protect your pension in a divorce.
  • A Qualified Domestic Relations Order might be necessary to grant any benefit from a pension.
  • The pension plan might specify the terms governing how the pension is divided.

Review the Laws for Your State

The first step in managing your pension while going through a divorce is knowing what the rules are for your state. While a pension can be divvied up between spouses during divorce, that division isn't automatic. Your soon-to-be ex would have to make a specific request for a share of whatever you've accumulated before the divorce is finalized.

Generally, the spouse would have to file a document known as a Qualified Domestic Relations Order (QDRO) before any financial benefit from a pension or other retirement accounts, such as a 401(k), can be granted. 

In terms of how much either spouse is entitled to, the rule of thumb is to divide pension benefits earned during the course of the marriage right down the middle. While that means your spouse would be able to lay claim to half, they would be limited to what was earned during the course of the marriage.

If you were enrolled in a defined-benefit plan for 10 years prior to tying the knot, for example, any contributions you or your employer made on your behalf during that time wouldn't count towards the amount a spouse could seek in a divorce.

Check the Details of Your Pension Plan

Once you're familiar with the rules governing the division of pensions in your state, the next step is to take a closer look at how the plan works. There are two key elements to focus on here: the method by which payments are distributed, and whether the plan offers a survivor's benefit.

With a pension, you normally have a choice between receiving a lump-sum payment or a monthly annuity. If your plan features a single-life payout and you choose the annuity option, the payments would stop at your death. If the plan has a joint-life payout, the payments would continue for the life of the surviving spouse. 

One alternative to splitting a retirement account is to offer another asset of equal value, such as your share in the family house.

It's important to understand how the plan works because it affects how you'll divide up the assets as part of the divorce. If you have a single-life payout, for example, your spouse would be subject to whatever payment option you've chosen. If your plan offers survivor benefits, the easiest course may be to persuade your spouse to maintain that benefit, rather than seeking a lump-sum distribution. Your ex would have to include those benefits in their gross income, but may be able to claim a deduction for estate tax.

Propose an Alternative

If you don't want to hand over half of your pension, offering your spouse other assets may be the best solution. If you own a home together mortgage-free, for example, you could allow your ex to retain ownership in exchange for waiving any rights to your pension.

Buying a life insurance policy equal to the amount of pension benefits your ex would be entitled to and naming him or her as the beneficiary is another option.

In either case, you're offsetting what your ex would get from the pension with something else of equal value.

You may have an out if your spouse also has a pension or other retirement assets to protect. If both of you have retirement accounts that are relatively similar in size, agreeing to walk away with what you already have can be a less time-consuming way to resolve the issue.

The Bottom Line

Getting divorced is stressful in any case and it pays to be smart about how you tackle the various financial issues that are involved. That's especially true when your retirement is on the line.

Before signing off on a division of your pension, take time to understand what your rights are and what options you have for working towards a compromise that will satisfy both you and your future ex-spouse.