Zynergy Retirement’s Guide to Divorce in Retirement
Divorce is always a challenging situation, both emotionally and financially. Besides the division of assets and debts, there is also the important issue of retirement planning to keep in mind during this challenging process. Here is a helpful guide to retirement planning and divorce in New Jersey.
Ways to Protect Your Retirement in a Divorce in NJ
Step one in protecting your retirement assets during divorce is to know the rules that govern your retirement plans. Most plans and accounts have specific tenets to be followed when dividing retirement assets during a divorce. Failure to follow these rules may lead to the forfeiture of some or all of those assets—even if they were in the divorce decree.
A divorce decree must say something to the effect of “the spouse is entitled to X percent of the participant’s TSP balance” somewhere in the document or one of its appendices. If it does not, the participant’s spouse receives nothing, regardless of any other agreement. The rules on dividing retirement assets and pensions vary from state to state, so be sure to determine what restrictions apply in your state and locality.
Qualified Domestic Relations Order (QDRO) Defined
An eligible domestic relations order (also known as a “QDRO,” pronounced “quad row”) is a court order, judgment, or decree related to child support, alimony, or property rights. It can also instruct your spouse’s pension plan on how to pay you your share of plan benefits.
A QDRO protects you and ensures that a marital settlement does not allow the funds in the retirement plan to be withdrawn without penalty and then deposited into the non-employee spouse’s retirement account. Don’t assume that your rights to retirement assets are covered just because your divorce decree states that you have a right to part of your spouse’s funds.
- QDROs only apply to IRS tax-qualified plans and are covered by the Employee Retirement Income Security Act or ERISA. They do not apply to military or government pensions governed by other laws.
Your lawyer should read the retirement plan’s summary and other documents because the QDRO’s terms must agree with the plan’s terms. Remember that the issues related to defined contribution plans differ from those related to defined benefit plans. This is just one more reason it helps to work with a specialist.
Protect your Retirement In the Case of Divorce
Divorce can make saving more difficult because household income usually falls when you become the only earner. At the same time, expenses rise once you maintain two separate households rather than just one. And as mentioned, the costs of ending the marriage can affect wealth, as can losing some of your retirement money in the divorce.
There are, however, some steps you can take to ensure that ending your marriage doesn’t mean ending the dream of a secure retirement. Some options include
- Understanding how Social Security spousal benefits work. If you have been married for at least ten years, you may be entitled to spousal or survivor benefits even after a divorce. If your ex was a higher earner than you, consider whether claiming benefits on their work record could help you get more extensive Social Security checks.
- Prioritizing retirement savings. As soon as your marriage ends, start rebuilding your budget with a focus on saving for the future. Take stock of where you are regarding your account balance, set a savings goal based on retiring without a spouse, and automate contributions to your retirement accounts to hit your target.
- Making intelligent investment choices. Earning a better return on investment can only help your nest egg grow.
By reworking your budget as soon as possible after divorce and ensuring retirement savings are a top priority, you maximize your chances of achieving the retirement security you deserve even without help from a spouse.
Your Retirement Payout Entitlement
This topic can often seem confusing. In most states, funds added to retirement accounts during a marriage are marital property, meaning you and your spouse have a right to them. If either of you entered the marriage with funds already in a retirement account,–money is often treated as separate property in a divorce, but this may vary by state. As a rule, only the assets deemed marital property is divided in the event of a divorce. Marital property consists of the assets acquired during the marriage and their earnings. If a defined contribution plan covers your spouse, the timing of your payment depends on the schedule. Some plans make an immediate lump sum payout, while others pay a lump sum in the future, be aware that taking out money from retirement plans could trigger a 10% tax and income tax.
What Is The IRS penalty for early withdrawal on retirement accounts during a Divorce?
Any withdrawals from a qualified retirement plan will not be subject to the 10% early withdrawal penalty if you receive them immediately when using a QDRO. If you wait and have them rolled over into an IRA, you will have to pay the 10% penalty if you received distributions from that new account.
Contact a Trusted NJ Retirement Planner Today
Divorce, even when amicable, is never easy and there are a lot of important financial matters to consider, including retirement planning. If you are recently divorced, or going through a divorce, contact Zynergy Retirement Planning in Red Bank, NJ to discuss your situation in a free consultation.