This question can’t be summed up with just one simple answer.
The reality is that what happens to your retirement savings after a divorce depends on several factors.
For one thing, you must look at the divorce laws and regulations for your state.
You also must consider the type of retirement plan that is in question in the divorce along with the state you’re in because there are different rules for how retirement plan funds can be given to spouses in a divorce.
You’ll need to check with your retirement summary plan for more details on distribution in a divorce. With joint-life payout retirement plans for example, your spouse can be entitled to benefits that they can collect even after you pass away.
You should also know that the type of plan you have will also affect the timing of how your spouse would be paid portions of your retirement funds (at once, periodically, or in the future etc.) should you be required to do so.
This is one of the most crucial parts of your retirement that you need to look into, which is the retirement plan itself. You need to discuss with your retirement administrator what your spouse could be entitled to if you were to divorce. This will save you from surprises later and help you to plan what you will do in the advent of a divorce ahead of time.
Did you earn most of your retirement savings before you were married? Do you have other assets that you acquired before marriage?
The money and assets you acquired before your marriage likely wouldn’t be considered a “marital asset” but rather a separate property. You’ll need to check with your state’s laws regarding what counts as separate property vs marital assets. A marital asset is an asset you and your spouse obtained together while you were married (ex: a house, car, etc.).
If you had your retirement plan before you were married and you were contributing money to that retirement plan, that money may not be considered a marital asset that gets divided, so the money would be yours to keep. Please note for clarification, you would only be entitled to the money you earned for the period you weren’t married. You may have to give your spouse a portion of your retirement that was paid into while you were married.
There’s also a case where you may not have to give up your retirement savings if you and your spouse can come to an agreement. Perhaps you can give them something of equal value to your retirement fund such as a car or the house in exchange that you get to keep all your retirement money. If you both have your own retirement plan, you can also decide to just keep your own individual earnings and retirement plans without splitting them.
However, the latter option may not work if your spouse does not have a retirement savings or if you’re the one without the retirement savings.
In order for you to claim the right to your spouse’s employer-sponsored retirement funds such as a 401(k), you’ll need a court ordered document called a Qualified Domestic Relations Order (QDRO). Note: Other plans may use a different term for the court order.
According to the U.S. Department of Labor, “A "qualified domestic relation order" (QDRO) is a domestic relations order that creates or recognizes the existence of an “alternate payee's” right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.”
An alternate payee would be the spouse who is claiming the right to have a portion or all of your payable retirement benefits if you were to divorce.
It’s not usually enough to say that a spouse can have “X” amount of funds in a divorce solely with a divorce decree. A QDRO is more official for legal purposes and may even be required by a retirement plan administrator. This court order is also costly and can cost up to $500 outside of attorney and other divorce-related fees. Please note that this document is only needed for retirement plans and pensions that fall under the Employee Retirement Security Act.
Retirement plans for the military and IRAs for example, do not use QDRO’s. Different documentation is required for those plans.
With QDRO’s, you can withdraw from your retirement funds without a penalty even before you turn 59 1/2 years old (the age you would have had to be before you could withdraw retirement funds without penalty). With this court order and approval from your retirement plan administrator, the next steps for your spouse to receive portions of your retirement fund can be examined between you, your spouse, and your attorney.
A lot goes into QDRO’s, so attorneys who are specialized in this area would be beneficial to you. They can assist you with knowing how much you will be paying out to your spouse and the frequency of the payout under this court order. They can also tell you what to expect with your retirement and what steps will happen next after the QDRO order or whatever the order is that applies to your situation.
There is no clear-cut answer on how divorce will impact your retirement. One thing is certain is that divorce is very costly both financially and emotionally.
To prevent the devastation a divorce could have on your retirement, please consider getting all the facts about your retirement plan. Not knowing what your plan details and how you’ll be affected if you were to get a divorce can end up costing you, literally.
If you’re not yet married, but plan to be married, you can consider a prenuptial agreement to protect your finances and assets when going into the marriage. It’s always best to consult with a financial advisor and a lawyer as well to know how your retirement will be impacted in a divorce.
Please note: The information provided on this website and in this blog does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. We are not attorneys.