How Does Divorce Impact Retirement Savings?

Getting divorced marks a major life change, both emotionally and financially. If you’ve built a life together, you’ve probably grown shared assets along the way—and untangling them can get sticky. 

As you divvy things up, you’ll have a lot to decide—like how you’ll split your time with your kids and who will keep the house. Retirement savings and financial assets will also be important parts of the discussion.  

You may find yourself having to relinquish some of the money you have in a 401(k)  or individual retirement account (IRA), or you may be entitled to funds in your ex-spouse’s accounts. Depending on the policy, a pension may be divided. Let’s take a deeper dive into how divorce can impact your retirement savings and income.   

How does divorce affect my retirement?  

Depending on what state you live in, division of marital property can look very different. Some states, called “community property states,” say that any financial assets you acquired together while you were married—including retirement savings—should be split 50/50. Other states, called “equitable distribution states,” give more leeway, saying shared assets should be divided equitably, based on a number of factors. 

But generally speaking, there’s a good chance that your retirement savings will be impacted in some way when you get a divorce.  

What happens to retirement accounts when you get divorced? 

While 401(k)s and IRAs can have only one account holder, funds that were added during the marriage are considered shared assets. But there aren’t clear-cut rules when it comes to dividing money at the asset level. Couples can choose to split 401(k) and IRA funds any way they choose, as long as they agree.  

You might decide to split assets 50/50, or you may negotiate to give up other assets in exchange for keeping all funds in your retirement account. If you’re unable to reach an agreement, the judge’s discretion will help divide the marital property in a way that’s fair for both parties and in accordance with state law.  

When it comes time to actually split funds, there are different procedures you’ll have to follow:  

Splitting 401(k) funds 

This requires a qualified domestic relations order (QDRO) that outlines how the funds should be split. If you’re on the receiving end, you can roll this money into your own retirement account or take an immediate distribution if you need cash now. The regular 10 percent early withdrawal penalty won’t apply, but you’ll still be on the hook for paying income taxes on that money.  

Dividing IRA funds 

This doesn’t require a QDRO. Instead, funds can be transferred from one spouse’s IRA to the other’s. These details should be spelled out in your divorce settlement. Again, you may be taxed if you choose to take a distribution instead.  

Divvying up thrift savings plan (TSP) funds 

A TSP is a retirement savings plan designed for federal government employees and uniformed services members. These funds can be split through a retirement benefits court order (RBCO). 

What happens to pensions when you get divorced? 

Pensions work a little differently than retirement savings accounts, so there are some important things to know when it comes to pensions and divorce.

Unlike a retirement account that you’re making elective contributions to, a pension is a defined benefit plan managed by an employer. If one spouse earned a pension while married, those funds will likely be seen as shared assets during a divorce. But because this money is distributed differently, splitting the money can be more complicated depending on the plan’s rules and your state’s laws (and whether payments are already being made).  

It’s important to look at the plan details when making decisions about a pension. You’ll want to understand what will happen if one of you dies or if one of you remarries—as these factors could impact what you’re eligible to receive. You can also spell out some of these conditions in your divorce decree. 

Because pensions can be a bit more complicated, some couples decide to negotiate other trade-offs. You might offer that your spouse keep more of another retirement account in lieu of taking some of the pension. If you do choose to split pension benefits, you’ll need to file a QDRO spelling out the details.  

What happens to Social Security when you get divorced?  

After a divorce, it may be possible to claim Social Security based on your ex-spouse’s work record, which could provide a monthly payment of up to 50 percent of their full retirement age benefit. And taking it won’t reduce your ex’s benefit amount. To be eligible to do so, you’ll need to:  

• Have been married for at least 10 years. 
• Be unmarried at the time you file for Social Security.  
• Have been divorced for at least two years and your former spouse is 62 or older, or your ex-spouse has already filed for their own Social Security benefits. 

If your former spouse has passed away, and you were married for at least 10 years and didn’t remarry until after age 60, it might also be possible to collect Social Security survivor benefits  on your ex-spouses’s record.  

When deciding how to approach Social Security, you’ll also want to look at what you’re entitled to on your own record. You can’t collect multiple benefits at once, so you’re not able to take your benefit and your ex-spouse’s benefit. If you’re eligible for more than one benefit, you’re generally entitled to receive whichever benefit is higher.  

What happens to life insurance death benefits when you get divorced? 

Unless your ex-spouse is listed explicitly as a beneficiary on your life insurance plan, they will not be entitled to any life insurance benefits. Though there are some cases in which a court may require an ex-spouse to get a life insurance policy (if they don’t already have one) and make their ex-spouse a beneficiary to ensure that minor children are taken care of. But generally, you both will take your own policies with you as you part ways.   

You may decide to change your beneficiary when you get divorced; or if you share children, you might choose to continue to list your ex-spouse as the beneficiary to ensure the kids are taken care of if the unthinkable were to happen.  

What happens to cash that’s accumulated in a permanent life insurance policy? 

Cash value in a permanent life insurance policy can be a flexible addition to a retirement plan, and though the cash value may have been built in only one spouse’s name, as with a retirement account, that pool of money is considered a marital asset during a divorce.  

As you make decisions about how to divide this money, make sure you understand the terms of your policy. Taking cash value out of a policy could reduce the benefit amount or invalidate the policy, so depending on what you do with this money, you may need to reevaluate your life insurance needs.   

Should finances influence your decision to get divorced?  

The decision to get divorced is a highly personal one. While it could create financial stress in the short term, it is also possible to end a marriage equitably in a place where both parties are happy with the decisions made. The right divorce agreement can create a situation in which both parties are more stable and happy—especially if you and your former spouse were financiaIly incompatible. 

Getting there, however, may take a little recalibrating. Your goals may change, and as a result, so will your financial plan. Your experienced financial advisor can help you adjust to your new normal and make a plan tailored to help you move forward.