How to Protect Your Retirement Savings During a Divorce

If you have decided that divorce is the right decision for you, protecting your marital assets is probably at the forefront of your mind. The process is emotionally draining, but it does not have to be financially draining—if you take the necessary steps to safeguard your assets and savings.

Especially if you are splitting up later in life, understanding how divorce affects retirement funds is crucial. Divorce rates have actually increased among older Americans, roughly tripling since 1990 among those ages 65 and older

Your retirement accounts and pensions will likely be among the highest-value assets you have. Do not risk losing them by being unprepared. Here are 4 ways to protect your retirement savings during a divorce.

1. Hire an experienced attorney.

   It is essential to work with an attorney who understands how divorcing your spouse affects retirement funds. There are just too many unique considerations to navigate the legal system yourself.

   For example, pensions and retirement accounts involve a third-party administrator, unlike other types of community property. Your plan administrator is required by law to distribute payments to you in accordance with the terms of the plan.

   If this involves making payments to your ex-spouse, the plan administrator needs a qualified domestic relations order (QDRO) but this is complicated to obtain. Also, several state government plans such as the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS) and Civil Service Retirement System (CSRS) require a QDRO.

   A skilled attorney will be able to advise you on dissolution and mediation options and help you understand how to protect your retirement savings during a divorce with a qualified domestic relations order.

2. Consider your Social Security benefits.

   You and/or your spouse may be eligible for Social Security benefits, which provide partial replacement income for qualified retirees and their families. To qualify, you must pay into the Social Security program during your working years.

   The spouse who earned less during the marriage may be able to receive more Social Security benefits. This is based on the higher-earning spouse’s income, but only if the marriage lasted for at least 10 years.

3. Don’t let taxes take a bite of your savings.

   It is common for a divorcing spouse to transfer IRA assets into another account. If not done correctly, this process can result in excessive taxation. You need to wait until you are officially divorced. This avoids your transfer looking suspiciously like an asset distribution and triggering extra taxes.

4. Be prepared to share.

   Many people mistakenly think that because a 401(k) or IRA is in their name, it is theirs to keep in the split. However, these funds are often considered marital property. There are nine states where everything owned together is subject to an expected 50-50 split, and California is one of them.

   Some couples choose to leave the retirement account intact rather than splitting assets. For example, one spouse will keep the family home, while the other retains the retirement account of a similar value. However, this is not always the best option. This is why it is key to work with an experienced attorney in California to avoid unpleasant surprises.

Divorcing your partner at any age isn’t easy. Ensuring your assets are protected will mean you’ll leave your marriage with more of the money you’ve worked so hard to save. If you want to protect your retirement savings during a divorce, connect with us.