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Can You Keep Your Pension in a Divorce?

Closeup of "pension," "401(k)," and "retire" written on white eggs in nest on wood

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Retirement accounts are often one of the biggest assets in a divorce, and many people going through divorce worry about losing their retirement savings, especially if they are nearing retirement age.

If you are going through a divorce and are wondering if there are ways to keep your entire pension during a divorce, the answer is yes, but only if you "buy out" any marital interest your spouse has in the asset.

How Does a Pension Work?

Pension plans are unique because they promise to give employees a set amount of retirement benefits for life. This is referred to as a defined-benefit plan. Unlike defined-contribution plans such as 401(k)s, employees do not have a role in contributing to the funds. Instead, employers are responsible for making contributions on the employee's behalf. Earnings on these investments then fund income for the employee during retirement.

Traditional pensions are not as common as they once were. Today, public sector employers tend to offer pensions while private sector employers tend to offer 401(k)s. Common types of pensions include:

If you have a pension, you will want to read the below information on how to best protect it during your divorce.

How Are Pensions Usually Divided or Split in a Divorce?

Generally speaking, a pension that is earned during the marriage is considered to be joint marital property and is subject to division during divorce, just like any other marital property. Any part of the pension that was earned prior to the marriage can be considered non-martial, separate property. Separate property is not divided during divorce.

Will You Lose Half Your Pension During a Divorce?

Before you automatically assume that you will lose half of your pension in your divorce, keep in mind that a pension is usually only one piece of the pie when it comes to property settlement. It is possible to divide your marital assets in a way that would allow you to keep your entire pension in exchange for your spouse getting other property of the same value.

Factors That Need to Be Considered

If all or part of your pension is marital property, there are a few different factors that you should consider when deciding how to handle the property distribution part of your divorce:

The Details of Your Plan

You will want to understand the details of your pension plan before agreeing to anything with your pension in a divorce, including how your benefits will be distributed, and if your plan includes a survivor's benefit.

For example, you may have the option to receive your pension-defined benefits in a lump-sum payment or monthly. Your plan might also have a single-life payout, which means the monthly payments would stop at your death, or a joint-life payout, which means the payments would continue until your spouse's death.

You need to know both of these details before negotiating a property settlement.

How Are Pensions Usually Calculated During a Divorce?

There are two basic ways to treat a pension in a divorce: either both spouses can agree to share the monthly annuity payments (or lump-sum payment) during retirement, or they can divide the present value of the pension at the time of the divorce.

Either way, it's important to know what the pension is worth — whether it's the present-day value or what the benefit will be during retirement.

There are special formulas that can be used to figure out both, though it can get complicated, especially if a portion of the pension is non-marital because it was earned before the marriage. You can use an online service to calculate the present value of the pension or get this information from an accountant or actuary.

If you and your spouse choose to divide the present value of the pension, you can decide to offset your spouse's share of the pension with other assets such as equity in the marital home. This "buy out" method is common.

Qualified Domestic Relations Order

Pensions are not automatically divided in a divorce. Usually, the spouse who is awarded part of a pension must obtain a qualified domestic relations order (QDRO) that can be submitted to the pension plan administrator. A QDRO informs the plan administrator how to divide the pension benefit when it comes time.

A QDRO is something that is handled after a divorce is finalized, so it's important to not let this task go undone (especially if you are the spouse who is receiving the retirement benefits).

Note: Pensions for federal employees use something called a Court Order Acceptable for Processing (COAP) instead of a QDRO.

Tax Implications

For the most part, property transfers "incident to divorce" are tax-free. Not all assets carry the same tax implications, so even when two assets appear to have the same value, the values could end up being very different after taxes are applied.

For example, let's say one spouse gets the marital home with $300,000 in equity as part of their property settlement, while the other spouse gets $300,000 in other assets. The spouse who got the home may be hit with capital gains tax if they decide to sell the home, making the settlement unequal.

In the case of pensions, tax applies when the monthly benefit is paid during retirement. Therefore, it is wise to take the anticipated tax burden into account when figuring out an equitable property split.

A Lawyer Can Help Protect Your Pension

Going through a divorce is stressful. Not only is an important relationship ending, but your assets and property have to be fairly split. You may be worried about your financial well-being and you could even be resentful about having to "share" your retirement savings with someone you may not think deserves it.

An experienced family law attorney in your area can help you reach a smart settlement that protects your future.

Next Steps

Contact a qualified divorce attorney to make sure your rights are protected.

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