Protecting Your Pension in Divorce
Pensions may be divided between spouses in the event of divorce - learn how this could impact your pension in retirement.
- In most cases, your pension will be split between you and your soon-to-be-ex-spouse during a divorce
- If you prefer to keep your pension intact, you can negotiate other items, giving up more of your share of your savings account, for instance, to ensure your retirement savings is there when you need it
- Judges won’t always split pensions in half. The decision will be made based on the entire financial picture
If you have a pension for your retirement, divorce can throw a wrench into your plans. Courts will divide all marital assets based on local laws, and pensions are considered an asset. If you still want to have a substantial pension after divorce, it’s important to know your rights.
How does retirement work in a divorce? During preparations for your court date, you’ll likely be asked to provide a list of all your assets, including any retirement accounts you hold. The court will only look at the money you accumulated during the time you were married to your soon-to-be-ex. In other words, the portion of your pension that was in place for the years before you tied the knot won’t be counted. The portion of the pension that is earned during the marriage then is considered a joint asset and is divided in the divorce decree.
Here are a few other details you’ll need to know if you have a pension and a divorce is in your future.
Rights Vary Based on State
When it comes to divorce and retirement pay, there is no one-size-fits-all answer. There’s a good reason for that. Asset splits are decided by state law, and those laws vary from one state to another. That’s in addition to the discretion the judge will use in applying those laws. There are two major types of laws governing the division of assets in a divorce:
- Common law--In most states, property acquired by a spouse is that spouse’s. That doesn’t mean the assets won’t be split, though. The division just isn’t as straightforward as it is in a community property state. If you live in a state that follows common law in dividing marital assets, your pension, along with other assets, will be divided by the judge, taking all factors into consideration.
- Community property--In a handful of states, all assets acquired during marriage belong to both parties, even if an asset is put only in one person’s name. If you live in Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, or Wisconsin, community property laws apply to you.
Once you’ve narrowed down the general laws that apply to your situation, you may still be wondering, “Can my wife get my retirement if we divorce?” No matter which type of state you live in, the judge will look at the totality of your assets and come up with an equitable distribution. So if, for instance, your spouse has a pension, as well, and its value is comparable to yours, chances are the judge will decide to allow you each to keep your separate plans.
Review How Your Pension Payments are Distributed
When it comes to spouse retirement benefits after divorce, another important factor is how the funds are distributed. You may not realize it, but there are two different types of pension payouts:
- Single-life payout--With this type of retirement plan, payments are slightly higher in return for them stopping when you die, even if you have a surviving spouse.
- Joint-life payout--This retirement plan is set up to continue making slightly lower payments to your survivors even after your death.
This difference is relevant when answering the question, “Can my ex-spouse go after my retirement?” A retirement plan with a joint-life payout has already promised to take care of your spouse in the event of your death. This becomes a negotiation point during a divorce since, if the plan allows it, you can offer to leave the survivor benefit in place.
There’s another reason to pay attention to how the funds are distributed. You can’t simply take money out of a pension to pay your spouse. Instead, the divorce decree will need to be very specific as to how the plan assets are to be divided. Even with that, your spouse will have to file something called a Qualified Domestic Relations Order (QDRO) to direct the plan administrator to distribute the funds. The receiving spouse will be taxed on the funds unless they're rolled over.
Discuss With Your Partner & Leverage Other Assets
The best time to deal with how these types of things will be handled is long before the divorce is filed. You can protect yourself before marriage with a prenuptial agreement, including specific verbiage that protects your pension. You can also meet with an attorney and have a decree drawn up that states how things will be split in the event you divorce. Chances are, though, that by the time you start thinking about it, you’ll already be on your way to divorce court. One of the best things you do, if your spouse is amenable to it, is to sit down and discuss division of assets, including benefits, after separation. This is often the best way to work things out amicably. Even if things aren’t amicable, though, you can divide things up in a way that protects your own retirement savings. When it comes to divorce and pension rights, one of the best things to do is leverage other assets to keep your retirement savings intact. Negotiate a smaller share of your home’s value, for instance, in exchange for keeping your retirement account alone.
Even if divorce doesn’t appear to be in your future, asking, “How do I protect my retirement in a divorce?” is a great idea. It gives you the chance to examine your assets and make sure you’re protected. One of the best things you can do is meet with a Certified Financial Planner® who can conduct a full review of your assets and make recommendations to ensure both you and your spouse are equally setting aside money for retirement.