Divorce and Retirement: Protecting Your Financial Future
Methods to Prepare for Life's Biggest Decisions
When couples divorce, most think of child custody, who gets the house, and the potential for alimony payments. Fewer people consider how divorce will impact their financial lives later, during retirement.
Unfortunately, retirement plans and pensions are common targets for both parties. The best way to protect your financial future is to hire an Alabama divorce attorney who will represent your interests. Additionally, you can find out the basics about what to expect below.
Understanding the Rules
The division of retirement assets isn’t always straightforward. Dividing assets in an individual retirement account (IRA) is usually straightforward. Dealing with pensions and defined-contribution plans can be more complicated.
QDROs for IRAs and 401(k)s
For straightforward situations like IRAs and 401(k)s, the court issues a qualified domestic relations order (QDRO) that outlines how these retirement assets will be divided. The QDRO applies only to specific types of retirement plans. Other retirement assets will need to be addressed separately.
Division of TSPs
Thrift Savings Plans (TSPs) are a good example. TSPs are defined-contribution plans offered to federal employees and service members, not traditional retirement accounts. The judge must handle them differently since the QDRO does not apply.
Instead, the divorce decree must clearly state how the TSP balance will be divided. The decree can reference this unique retirement plan anywhere in the document. If it doesn’t, the participant’s spouse will not be entitled to anything from the plan, even if the couple agreed elsewhere that they would.
Handling Pension Benefits
Dividing assets like IRAs and TSPs is relatively straightforward. The same isn’t always true for guaranteed pension payouts.
Typically, a pension earned during the marriage is considered joint property. As such, it will be subject to some form of division. There are, however, several ways that the benefit can be divided.
Pensions sometimes offer survivor’s benefits, which ex-non-working spouses can retain following the divorce. Sometimes, the survivor benefit gets waived, and the couple splits the monthly benefit. The best way to determine which of these solutions is most appropriate is to consult a divorce attorney.
Collecting From Social Security
When it comes to Social Security benefits, the magic number is 10. If you’ve been married to your ex for at least a decade, you may be eligible to receive survivor’s benefits. However, keep in mind that if you are also entitled to Social Security benefits, you can’t collect both. You’ll get the larger of your benefit or your share of the ex-spouse’s.
During amicable divorces, couples approaching the 10-year mark may want to consider alternatives like legal separation. Legal separation comes with many of the same benefits as divorce but preserves retirement benefits, which can be important if one spouse is the primary bread winner.
The Importance of Proper Valuation of Retirement Assets
Most people think they have a good handle on joint finances and retirement assets. Many of them are wrong. Problems don’t just arise in unusual circumstances, such as prolonged domestic partnership prior to marriage. All too often, dishonesty also comes into play.
Your spouse may have accounts you don’t know about. On the other hand, they might have hidden debts that only surface as the divorce approaches, and you get ready to divide assets. You can mitigate risk by doing your homework and requesting complete information about all retirement plans and accounts.
Accurately valuing retirement assets isn’t always a straightforward process. Annuities, for example, can rarely be split down the middle without incurring penalties or fees. Failing to take them into account can leave you with less money during your retirement.
Strategies for Minimizing Financial Impact
Now that you have a better idea of what’s involved in dividing retirement assets let’s look at a few ways to minimize the financial impact they could have on your retirement.
Prepare for the Worst
In an ideal world, couples who want to get married would consider prenuptial agreements that clearly define the division of all assets, including retirement plans and accounts, upon a potential divorce. That’s rarely the case, though. Newlyweds don’t want to prepare for the worst. They want to focus on more pleasant things.
If you’re happily married, you should still consider talking to your spouse about creating a postnuptial agreement. Most people find that it’s worth having one unpleasant conversation to know that their financial futures will be protected should anything go wrong.
Know What Lies Ahead
The first step is to take inventory of all retirement assets. Anyone facing a divorce should consider all assets acquired during the marriage and all debts. This approach will offer a clearer picture of what to expect.
In most divorces, you retain assets brought into the marriage. Everything earned after you tie the knot will be subject to division. However, there are exceptions. Prolonged domestic partnerships preceding official marriage can alter what a judge sees as joint property, to cite just one of them.
You should also know that debt owed inside retirement plans is also shared. If your spouse took out a loan from the plan, the remaining assets will be split 50/50 unless the divorce decree requires the loan to be repaid before the division.
Stay On Top of Paperwork
Once you get a court order for separating a retirement asset, send it to the plan or account custodian immediately. Delaying it can cause unnecessary complications or even lead to the forfeiture of what you’re due if the paperwork is so outdated as to become invalid.
While private pension plans must accept court orders regardless of the issue date, there’s another problem to look out for here. You must submit the paperwork before the plan or pension assets are distributed. Failing to do so can leave you with the frustrating and often expensive task of trying to recover the assets yourself.
Hire an Attorney
The best way to protect your financial future is to hire a divorce attorney. You’ll get help with the entire process and may even find that you’re entitled to more money than you initially believed. If you want to have the best possible retirement following a divorce, start planning now.
