How Will Divorce Impact My Retirement Savings?

If you and your spouse are ending your marriage, you’ll have to separate your finances. The impact of divorce on your retirement accounts can be significant, especially if you’ve built a high balance in these accounts over the years.

To start, how retirement accounts are divided in divorce depends on the state where you live. In community property states, these assets are generally divided 50/50. In common law states, assets are divided equitably, with the courts determining what’s equitable. 

If you're wondering how the end of a marriage can impact retirement accounts, read this guide on how retirement funds are divided in divorce.

Money That’s in Retirement Accounts

You might assume that money in 401(k)s and IRAs goes to the person named on the accounts. But even though there’s only one account holder, when it comes to divorce and retirement savings, the money that goes into them during a marriage may belong to both people. You and your spouse will need to file a qualified domestic relations order (QRDO), which outlines how the money will be divided.

The spouse with more money may have to transfer a portion of their money to the other spouse. That’s usually done with a direct rollover since that’s typically the most tax-efficient option.

The spouse receiving money may choose to access these assets prior to age 59½, which would typically trigger a penalty unless used for one of the exceptions. Money distributed from a qualified plan under a QRDO is exempt from the 10% early withdrawal penalty that normally applies, though the taxes still must be paid.

Keep in mind that most money in traditional 401(k) and IRA retirement accounts will be taxed when it’s withdrawn, so you’ll need to calculate the after-tax value to decide what your accounts are worth. You and your spouse may agree to keep your retirement accounts as they are, and exchange other assets, such as the value of your home or other investments, to balance your financial obligations.

Money That’s Coming in a Pension 

Like funds in retirement accounts, pensions that are earned during a marriage are considered shared assets in most states. Dividing a pension can be tricky since plan rules and state laws come into play. 

The spouse with the pension, or the bigger pension, may want to use other assets to offset the pension instead of dividing the pension itself. One option is for the spouse without the pension to receive savings, stocks, bonds or other assets to offset the value of the pension.

Money From Social Security

If you were married for at least 10 years and both you and your ex-spouse are eligible for Social Security benefits, the laws are clear. If the divorce was more than two years ago and the lower-earning spouse has not remarried, they can apply for benefits worth up to half of the higher earner’s full benefit. The higher earner still collects the same benefit. The Social Security Administration has a family benefit website that provides details on divorce benefits.

Money From Life Insurance

When it comes to money for retirement, policies that have an accumulated cash value may be considered joint property that has to be distributed accordingly. 

Get Help Moving Forward

Divorce can make a big impact on your overall finances, not just your retirement accounts. Setting up two households and separating your income and expenses can mean you’ll need to take a fresh look at your goals and the steps that will get you there.

Reach out to a Farm Bureau agent or financial advisor for compassionate guidance as you navigate this challenging time.