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Divorce | Estate Planning

Protecting Your Pension in a Divorce

5 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

Pensions are something you may want to pay special attention to in a divorce, moreso than other assets. Cashing out retirement savings early can lower their value. It’s also another complication on top of all the other pains that a divorce entails.

If you’re approaching retirement age, pensions are an especially sensitive issue. Whether you have a defined contribution plans like a 401(k) or a defined benefit plan like a pension, these assets were designed to provide financial security once you stopped working.

Any pension you earn during your marriage is considered joint property. This means it can be divided in case of a divorce, just like your other assets. Fortunately, there are ways to prevent your pension from being divided with a spouse in a divorce.

What Happens to Retirement Savings in a Divorce?

In most cases, if you have earned a pension during a marriage, it will be considered joint marital property. That means it will be fair game for division as part of a divorce.

Pensions may not be financially excluded from divorce, but you don’t necessarily have to give half of it away to your spouse either. Your pension is just one part of the property settlement from a divorce.

A skilled lawyer can help you bargain with your retirement accounts, or convince your spouse to settle for something else. It is often possible to split your marital assets in a way that will allow you to keep your pension in exchange for sharing other property.

Pensions From Before Marriage

If you earned your pension (in part or in whole) prior to marriage, then it may be considered non-marital property. You’ll be in a good position to argue that your retirement savings should not be divided with your spouse during the divorce, though there’s no guarantee it will work.

How Pensions Are Divided and Calculated in Divorce

There are two common ways in which a pension can be treated in a divorce:

  • You and your spouse agree to share the monthly proceeds
  • You split the current total value at the time of your divorce

Whichever option you go with, you must know the value of your pension.

Accountants use formulas that calculate pension payouts at both the current value and the expected value at the time of your retirement. This may get complicated if a portion of your pension has been funded before the marriage. For simple cases, you can use an online pension calculator to get a rough estimate of how much your pension is worth.

When you make any decisions regarding the status of your pension after a divorce, you also need to account for the specifics of your retirement benefits.

Payout Rules: Some plans provide monthly payments that will cease after your death; others will continue payments after your death to support your spouse.

Tax Implications: Taxes are yet another factor that should be taken into account when deciding how to divide your pension, as they may affect the final amount each spouse receives. Most property re-distribution that happens during a divorce is tax free. However, some assets have the different tax implications, even if the seem to be worth the same amount.

For instance, a spouse who gets property (like a marital home) as part of their divorce settlement may be required to pay a capital gains tax if they sell the property. When it comes to pensions, a tax is applied only when you receive your monthly benefit during retirement.

Getting a Qualified Domestic Relations Order (QDRO) Instead of Cashing Out a Pension

The value of a pension is frequently split in a divorce, but the pension itself typically remains intact to preserve its benefits.

Typically, a spouse who receives a portion of pension benefits will need to receive a qualified domestic relations order (QDRO). The spouse will then need to submit the QDRO to the pension plan administrator. The QDRO will inform the pension plan administrator how your pension benefits should be divided.

If a retirement plan comes from the federal government, the document will be called a Court Order Acceptable for Processing (COAP) instead of a QDRO.

A Prenuptial Agreement Can Protect Your Pension

It’s understandable to ensure that you and your spouse will have security and predictability no matter how your marriage proceeds. To preemptively protect your pension (as well as other assets) from being lost in a divorce, you can use a prenuptial or postnuptial agreement to specify that you want your pension to be considered as separate property.

Without a prenuptial agreement, some part of your pension will most likely go to your spouse when you are divorced. This may include income that was generated from your pension funds — for instance, by investments your fund has made. 

If you decide to draft a prenuptial agreement, both you and your spouse will need legal representation for the agreement to be valid. You will need a lawyer to make sure that what you sign is fair to both parties, and that both you and your ex-partner understand the real-life consequences of the agreement. 

Drafting a prenuptial agreement includes several services. Most lawyers will offer you a “prenup package” for a flat fee. Depending on the specifics of your case, you may end up paying from $1,500 to $5,000. However – especially if you and your partner agree on the specifics of property division – an unbundled attorney can provide affordable services limited to drafting the agreement itself.

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