When Retirement Meets Divorce: The Truth About Splitting Pensions, TSPs, and More

Key Takeaways:

1. Divorce can significantly impact your retirement plans, dividing pensions, Thrift Savings Plans (TSPs), and other federal benefits.

2. Understanding your rights and the legal framework is essential to protect your financial future during a divorce.

Retirement and Divorce: What You Need to Know

Divorce is never easy, but it becomes even more complicated when retirement benefits are involved. As a public sector employee or retiree, you have unique benefits that require special consideration in a divorce. Your pension, TSP, and other benefits could be subject to division, so understanding how the process works is vital.

How Are Federal Pensions Divided?

The Role of the Court Order

Your pension isn’t automatically split during a divorce. A court order, often called a Qualified Domestic Relations Order (QDRO) or a Court Order Acceptable for Processing (COAP), is required to divide federal pensions like those under FERS or CSRS. This document specifies how the pension is divided between you and your ex-spouse.

Community vs. Equitable Distribution States

The division of pensions depends on your state’s laws. In community property states, assets acquired during the marriage are typically split 50/50. In equitable distribution states, the division may be based on fairness, which doesn’t always mean equal.

Impact on Your Annuity

If your pension is divided, your ex-spouse’s share is deducted before your monthly annuity is paid. You’ll receive the remaining portion, and any survivor benefit elections will also impact your annuity.

Splitting Your Thrift Savings Plan (TSP)

Court Order Requirements

Just like your pension, dividing your TSP requires a court order. The TSP must be specifically named in the court order, outlining the division percentage or dollar amount your ex-spouse will receive.

Tax Implications

Transferring funds from your TSP to your ex-spouse’s retirement account can have tax implications. However, direct rollovers to another retirement account can help minimize tax liabilities for both parties.

Protecting Your Contributions

While your TSP balance may be divided, your future contributions are yours alone. After the divorce, you can rebuild your TSP by maximizing contributions, especially if you’re eligible for catch-up contributions.

What About Social Security Benefits?

Eligibility for Spousal Benefits

Your ex-spouse may be eligible for Social Security spousal benefits based on your earnings record if:

• The marriage lasted at least 10 years.

• They are 62 or older.

• They are unmarried.

No Impact on Your Benefits

The good news? Your ex-spouse’s claim won’t reduce your Social Security benefits. Each of you can claim benefits independently based on the same earnings record.

FEHB and FEDVIP: Health and Dental Coverage

Losing Coverage as a Former Spouse

FEHB and FEDVIP coverage typically ends for your ex-spouse after the divorce unless they qualify for Temporary Continuation of Coverage (TCC) or convert to an individual plan. They must apply within 60 days to maintain some form of coverage.

Your Coverage

Your own FEHB and FEDVIP coverage remain intact. However, if you’re changing family coverage to self-only or self-plus-one, notify your agency promptly to adjust your premiums.

Survivor Benefits: Who Gets What?

Designating a Survivor

Survivor benefits can be a contentious issue in divorce. If you’ve elected a survivor annuity for your ex-spouse, they’ll continue to receive a portion of your pension after your death. This election must be included in the divorce decree.

Costs and Considerations

Survivor benefits come at a cost, reducing your monthly annuity. Carefully evaluate whether this election aligns with your financial priorities post-divorce.

Division of Life Insurance (FEGLI)

Changing Beneficiaries

Under the Federal Employees’ Group Life Insurance (FEGLI) program, your divorce decree may require you to maintain your ex-spouse as a beneficiary. Alternatively, you can update your beneficiary designation if the court order doesn’t mandate otherwise.

Premium Adjustments

Remember, FEGLI premiums increase with age. If you’re required to keep a policy for your ex-spouse, factor this into your long-term budget.

Financial Planning Post-Divorce

Rebuilding Your Retirement Savings

Divorce often reduces your retirement assets. To recover, consider the following:

• Max out TSP contributions, including catch-up contributions if you’re 50 or older.

• Explore other investment vehicles like IRAs or Roth IRAs.

• Work with a financial planner to create a strategy tailored to your new circumstances.

Adjusting Your Budget

Your income and expenses will likely change post-divorce. Revise your budget to reflect these changes, prioritizing essential costs and retirement savings.

Key Deadlines and Considerations

Timelines for Court Orders

Submit court orders to the appropriate offices promptly. Delays can affect the processing of benefit divisions.

Open Season Adjustments

If your divorce occurs near Open Season, review your health and dental coverage options. This is an opportunity to adjust your plan to better suit your new situation.

Beneficiary Updates

Don’t forget to update your beneficiary designations for FEGLI, TSP, and other accounts. Failing to do so could result in benefits going to unintended recipients.

Protecting Your Future

Consult Legal and Financial Experts

Navigating divorce and retirement benefit division is complex. Consulting experts can help you understand your rights and obligations, ensuring you make informed decisions.

Stay Informed

Laws and regulations regarding federal benefits can change. Stay updated to protect your financial interests.

When Divorce and Retirement Intersect

Divorce during or after a career in the public sector can feel overwhelming, especially when retirement benefits are involved. By understanding the legal framework, meeting deadlines, and seeking expert guidance, you can navigate this challenging time while safeguarding your financial future.