Retirement accounts are often one of the biggest assets in a divorce, and many people going through divorce worry about losing their retirement savings, especially if they are nearing retirement age. If you are going through a divorce and are wondering if there are ways to keep your entire pension during a divorce, the answer is yes, but only if you “buy out” any marital interest your spouse has in the asset.
How Does a Pension Work?
Pension plans are unique because they promise to give employees a set amount of retirement benefits for life. This is referred to as a defined-benefit plan. Unlike defined-contribution plans such as 401(k)s, employees do not have a role in contributing to the funds. Instead, employers are responsible for making contributions on the employee’s behalf. Earnings on these investments then fund income for the employee during retirement. Traditional pensions are not as common as they once were. Today, public sector employers tend to offer pensions while private sector employers tend to offer 401(k)s. Common types of pensions include:
• Teachers pensions
• State and federal government employee pensions
• Military pensions
Generally speaking, a pension that is earned during the marriage is considered to be joint marital property and is subject to division during divorce, just like any other marital property. Any part of the pension that was earned prior to the marriage can be considered non-martial, separate property. Separate property is not divided during divorce. Before you automatically assume that you will lose half of your pension in your divorce, keep in mind that a pension is usually only one piece of the pie when it comes to property settlement. It is possible to divide your marital assets in a way that would allow you to keep your entire pension in exchange for your spouse getting other property of the same value.
Factors That Need to Be Considered
If all or part of your pension is marital property, there are a few different factors that you should consider when deciding how to handle the property distribution part of your divorce:
The Details of Your Plan
You will want to understand the details of your pension plan before agreeing to anything with your pension in a divorce, including how your benefits will be distributed, and if your plan includes a survivor’s benefit. For example, you may have the option to receive your pension-defined benefits in a lump-sum payment or monthly. Your plan might also have a single-life payout, which means the monthly payments would stop at your death, or a joint-life payout, which means the payments, would continue until your spouse’s death. You need to know both of these details before negotiating a property settlement.
How Pensions Are Usually Calculated During a Divorce
There are two basic ways to treat a pension in a divorce: either both spouses can agree to share the monthly annuity payments (or lump-sum payment) during retirement, or they can divide the present value of the pension at the time of the divorce. Either way, it’s important to know what the pension is worth whether it’s the present-day value or what the benefit will be during retirement. There are special formulas that can be used to figure out both, though it can get complicated, especially if a portion of the pension is non-marital because it was earned before the marriage. You can use an online service to calculate the present value of the pension or get this information from an accountant or actuary. If you and your spouse choose to divide the present value of the pension, you can decide to offset your spouse’s share of the pension with other assets such as equity in the marital home. This “buy out” method is common.
Qualified Domestic Relations Order
Pensions are not automatically divided in a divorce. Usually, the spouse who is awarded part of a pension must obtain a qualified domestic relations order (QDRO) that can be submitted to the pension plan administrator. A QDRO informs the plan administrator how to divide the pension benefit when it comes time. A QDRO is something that is handled after a divorce is finalized, so it’s important to not let this task go undone (especially if you are the spouse who is receiving the retirement benefits).
For the most part, property transfers incident to divorce are tax-free. Not all assets carry the same tax implications, so even when two assets appear to have the same value, the values could end up being very different after taxes are applied. For example, let’s say one spouse gets the marital home with $300,000 in equity as part of their property settlement, while the other spouse gets $300,000 in other assets. The spouse who got the home may be hit with capital gains tax if they decide to sell the home, making the settlement unequal. In the case of pensions, tax applies when the monthly benefit is paid during retirement. Therefore, it is wise to take the anticipated tax burden into account when figuring out an equitable property split.
A Lawyer Can Help Protect Your Pension
Going through a divorce is stressful. Not only is an important relationship ending, but your assets and property have to be fairly split. You may be worried about your financial well-being and you could even be resentful about having to “share” your retirement savings with someone you may not think deserves it.
How to Protect Your Pension in Divorce
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. The first step in managing your pension while going through a divorce knows 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 a husband or wife 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, he or she 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. 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
Dividing Assets at Divorce
Couples can divorce later in life for the same reasons younger couples split up infidelity, financial pressures, regrets about earlier decisions, or a desire for greater independence. But when you’re over 50, these reasons are framed by aging and the realization that you have more years behind you than ahead of you. Older couples face unique aging-related issues that can factor into the decision to divorce including health concerns, tensions brought on by living in closer proximity in retirement, losing parents and friends, and even the unsettling loss of youth. While there are differences in the emotional impact of divorce for couples who end their marriage later in life, the biggest difference is that there is less time to recover financially, and this reality colors many of the issues that are unique to late-life divorce. If you’re filing for divorce later in life (or are just considering it), here’s a look at some of the challenges you might face. Part of the divorce process will be dividing your assets with your spouse. The market value of an asset isn’t always the only consideration when you’re making these decisions, because some assets will be more useful to you later in life than others. For example, you may have difficulty deciding who gets to keep the house for a number of reasons.
Keeping your house provides you with future benefits that might be more important the older you are because of the following factors.
• Age triggers eligibility for real estate property tax exemptions and waivers.
• You are eligible for a reverse mortgage beginning at age 62. A reverse mortgage offers a potential stream of income.
• Primary residences receive special treatment for people qualifying for public benefits (for example, Medicaid).
• Tax benefits such as deductions for mortgage interest and taxes and exclusions from gains upon sale can be important in later years.
• Owning a house means you have potential rental income.
• Keeping the house means you have access to equity even if you decide to downsize.
Dividing retirement plans can be complicated, and requires careful attention when your lawyer is preparing the final paperwork for your divorce. You may need a separate court order, usually called a Qualified Domestic Relations Order (QDROs), to cover the division of retirement benefits. Before making any decisions about retirement, get a copy of the Summary Plan Description from the retirement plan administrator. You should probably talk to a lawyer and find out about:
• when you can receive distributions and still avoid tax penalties
• whether you can get survivor benefits if your spouse dies, even after the divorce
• whether your spouse has taken any loans against a 401(k) plan that should be repaid before the funds are divided
• whether you’re entitled to any contributions made to retirement plans after the divorce
• whether you can get a hardship withdrawal if you need one, and
• if you are a civilian spouse with military retirement benefits in your divorce, whether your rights are protected under the military’s Survivor Benefit Plan.
Social Security benefits are not assets that a divorce court can divide, but the rules about benefits are relevant to your post-divorce income. If your marriage lasted 10 years or more and you’re 62 or older, you can collect retirement benefits on your former spouse’s Social Security record, without reducing your former spouse’s benefits, even after your divorce welcome news if you’ve been out of the workforce during your marriage. Also keep in mind:
• You may be eligible to draw benefits of up to 50% of your former spouse’s benefit.
• You can begin receiving retirement benefits at age 62 on either your own Social Security record or on your former spouse’s record, then switch to the other benefit when you reach full retirement age (if the other benefit is higher).
• Once you’ve been divorced for at least two years, you’ll be entitled to benefits through your former spouse even if your former spouse is eligible but not yet receiving benefits.
If your former spouse dies, you may be eligible to receive survivor benefits of 100% of your former spouse’s Social Security benefit. The basic requirements are:
• your marriage lasted at least 10 years
• you are at least 60 years old, and
• you are not entitled to retirement benefits equal or greater than that of your former spouse’s benefit.
Financial Planning After Divorce
Most of us plan to coast in our later years. If you suddenly find yourself getting divorced, you may also find you’ll be expected to live on less than you anticipated, in years where you earn less income. You may be forced to re-enter the workplace or work longer than expected. These are reasons why financial planning becomes crucial in late-life divorces. In particular, it makes sense to: Calculate living expenses. Having an accurate post-divorce budget will help you assess your income needs and figure out which assets best meet those needs.
• Aim for a mixed portfolio. The value of a mixed portfolio is even greater now. This is no time to bet your future on a single asset. Your home and retirement plan may be the extent of your marital estate, but remaining flexible about how they are divided is important. (
• Learn about tax consequences. When younger couples divorce, income tax implications of future retirement plan distributions are often ignored when valuing retirement assets, because it’s mere speculation. In a late-life divorce, however, reducing an asset’s value in the property division to account for likely tax consequences is appropriate.
• Understand the time value of money. Alimony, property buyouts, and other methods of delayed payment require an understanding of how the value of money changes over time. Calculations for present value, future value, and the effects of inflation are important financial planning tools.
• Generate income. Of course you’ll need to figure out how you can earn money. You should also evaluate assets for potential passive income, like rent, dividends, and income from businesses not requiring your direct involvement.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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