So you’ve got a pension coming your way… and a divorce, too.
These days, the divorce might be more common than the pension. According to a 2002 report from the Centers for Disease Control and Prevention, the probability of a marriage ending in the first 5 years is 20%, and 33% of marriages end within 10 years. Meanwhile, only 18% of private sector workers have a pension, compared to 35% in the 1990s, information from the Economic Policy Institute shows.
If you’re among the lucky few with a pension but you’re unlucky enough to be filing for divorce, the fate of one of your largest personal assets is likely at the forefront of your mind. Is your spouse entitled to a share of your pension checks? Here are the rules you need to know.
A pension earned by one spouse is usually considered a joint asset, as are other retirement accounts, such as 401(k)s, 403(b)s and IRAs, though state laws govern the latter. Usually, whatever is earned prior to the marriage remains individual property, while what is earned during the marriage is considered a joint asset.
However, the divisions of pensions in a divorce isn’t always a cut-and-dry situation. For one, unless you are actively receiving a pension (and thus know the exact details of the payment amount and frequency), it can be difficult to pin down its exact value.
Additionally, while a pension is usually considered a joint marital asset, that doesn’t mean it’s always split 50/50. The exact amount varies according to each state’s law and how much of the pension was earned during the marriage. But it’s important to remember that if you and your spouse signed a prenuptial agreement protecting your pension plan, your pension remains yours.
If you have a military or government pension, these are governed by their own specific set of rules and may not be subjected to the same rules when splitting your assets in a divorce.
If you have a pension, you’ve likely heard of the Employee Retirement Security Act of 1974 (ERISA). This is the set of regulations that protect pension holders. However 1984 brought the Retirement Equity Act, which protects spousal benefits as they relate to pensions.
In order to gain access to a percentage of your pension, your spouse would have to specifically ask for their share at the time of the divorce – not at the time of your retirement. This is done via a court order called a qualified domestic relations order (QDRO).
If your spouse is entitled to half or a portion of your pension, it would be withdrawn at the time of the divorce settlement and transferred into their own retirement account, usually an IRA. It’s important to note that when using a QDRO, the spouse is exempt from the tax ramifications of receiving their pension settlement.
It Varies By State
A general rule of thumb when it comes to splitting pensions in divorce is that a spouse will receive half of what was earned during the marriage, though it depends on each state’s laws governing this subject.
In equitable distribution states, assets (like your pension) are divided fairly – but this doesn’t necessarily mean 50/50. The vast majority of states are equitable distribution states. But there are also a few community property states, where all marital property is simply divided 50/50. There are only nine community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, with Alaska as an opt-in – so this arrangement is much less common.
The Power of Bargaining
If you have a pension and are in the midst of a divorce, don’t just fork over half – at least not at first. You may have a few bargaining chips on your side. First, find out if your soon-to-be ex has a retirement of their own. If it’s comparable to yours in value, it may behoove both of you just to call it even. After all, think of the money you’ll save on lawyers alone.
Second, if your spouse doesn’t have a retirement account of their own that’s equal to your pension, consider other joint marital assets that you may be able to offer them instead. Real estate would be your best choice here. In lieu of splitting your pension, try offering up your former home or another piece of real estate if it’s of comparable value.
The Bottom Line
When facing a divorce, your spouse will generally be entitled to some of your pension. However, how much your spouse will receive varies, as the laws governing pensions in divorce settlements vary by state.
Additionally, if you have a pension and are getting a divorce, follow the below tips to protect your financial interests:
- Familiarize yourself with your plan and its details. The more you know prior to settlement, the better.
- Hire an attorney with experience in pensions. You may also consider a QDRO specialist.
- Know that military and government pensions have their own separate set of rules.
- Consider offering another asset in lieu of your pension.
- Find out if your state is an equitable distribution state or a community property state. It matters.
- Don’t automatically assume your pension will be split 50/50. This isn’t always the case since most settlements are based upon what was earned during the marriage.
Tips for Retirement
- Are your savings sufficient? Whether or not you have to split your pension in a divorce, knowing how far your current savings will get you in retirement can help you plan ahead. Our comprehensive retirement calculator can give you a detailed look.
- Get expert help. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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