Update December 28th, 2024.

Divorce at any age can be emotional, draining, and overwhelming. The closer to your planned retirement age, the less time you have to save, invest, and make changes that ensure a secure financial life for you and your family after a divorce. Understanding your options before you file for or finalize your divorce is essential. This will help you make the best decisions for your financial future.

Disclosure

All materials and intellectual property are copyrighted by MillionaireSeries.com®.

This information is for educational purposes only. It is not intended to replace any advisor or specialist or provide investment, financial, tax, retirement, planning, or healthcare advice.

By reading this, you agree to hold MillionaireSeries.com® and its affiliates harmless for results achieved or not achieved.

Financial Considerations

Hopefully, you have previously created a financial and retirement plan with a qualified advisor, such as a Certified Financial Planner (CFP®). Once you are divorced, you need to understand your entire financial picture as a single person.

Some helpful questions you want to get started include these:

• Can I afford to retire when I want?
• Will my retirement savings allow me to maintain my current lifestyle? If you are not sure, click here to download the Magical Budget Template, and click here to view How to Budget Your Money.
• How will my divorce impact my financial plan?
• Where will I live, and what will it cost? These may include downsizing, renting out a room, or even moving.
• How will filing as a single person impact my income tax bracket and health insurance options?

You may have many questions about the future. You also face many present decisions that will influence your lifestyle through retirement. Don’t attempt this journey alone. A financial advisor can help you explore all the options before negotiating a settlement agreement.

Understanding Retirement Assets

Some states consider retirement assets earned during the marriage as community property. These assets are typically divided 50/50 in a divorce.

Examples of retirement assets include:

• IRA and Roth IRA – Both are individual retirement accounts. A Roth IRA is funded with after-tax dollars. They can be established at a brokerage firm or bank.
• 401K – employer offered plans by most public and private companies
• Pension – offered by employers and includes defined benefit plans guaranteed to pay specific monthly benefits through retirement
• 403B – employer-offered plans, such as universities, schools, and hospitals
• 457 – offered by government agencies
• Other options include Deferred Contribution Plans, Profit Sharing Plans, Thrift Plans, SEP IRAs, and SIMPLE IRAs

Each retirement plan has specific property division rules in a divorce.
For this reason, getting assistance from qualified advisors specializing in divorce and retirement is critical.

If you have questions or need support, click here:

Divorce and Retirement Plan Insight

Employer-Based Plans

An employer-based plan requires a QDRO, which stands for a Qualified Domestic Relations Order. This legal document authorizes the plan administrator to distribute part or all of the employee’s plan assets to the non-employee spouse.

QDROs

A QDRO will outline how the retirement assets will be divided in the divorce. The plan administrator will need the QDRO and either a registered marital settlement agreement or a divorce decree before they can transfer assets to the non-employee spouse.

Pensions

Pensions are commonly referred to as defined benefit plans. They require a QDRO and a valuation of the pension benefits’ current and future projected value. Typically, pension plans allow the non-employee spouse to receive their distribution in a lump sum. They may also continue as a co-annuitant and receive future payouts when eligible.

IRAs

An IRA held at a brokerage firm generally does not require a QDRO. However, the division of assets will require a Letter of Instruction plus a registered marital settlement agreement or divorce decree. Each brokerage firm has its own requirements, so it is best to work with someone qualified to assist you with the requirements before finalizing the divorce.

In community property states, retirement plan assets earned during the marriage are considered marital assets and divided 50/50. However, assets accumulated before the date of marriage or after the date of separation are considered the separate property of the account owner and are not eligible for division. This will require you to track separate property interests in these accounts.

It can take time to determine which assets are community or separate property. When assets have been moved, or there are incomplete records from the date of marriage, it is best to seek the expertise of an attorney or a financial professional. Experts may include a CFP®, CFP, CDFA®, an accountant, actuary, or Certified Divorce Financial Analyst (CDFA®).

Although transferring retirement accounts between spouses generally does not trigger taxes (assuming the assets are deposited promptly into a new retirement account), withdrawing from any retirement asset (except ROTH IRA or ROTH 401k) will trigger a tax event. Retirement asset withdrawals are generally taxed as ordinary income in the calendar year of the withdrawal.

If you are under 59 ½, the withdrawal will generally incur a 10% early withdrawal penalty. The one exception is taking a withdrawal per QDRO instructions. Also, check with a qualified attorney or financial professional before any decisions – especially ones that can’t be reversed.

If you feel overwhelmed or in need of support, click here.

Divorce and Health Insurance

Health insurance is a critical part of your divorce. If your medical insurance is through your spouse’s employer, you need to create a plan so you are not without coverage.

• If you are 65 or older, you are eligible for Medicare benefits.



• You can stay on your spouse’s health insurance through a guaranteed program called COBRA. This allows ex-spouses to remain on the same employer plan for a period of time. It is important to note that your spouse’s employer will not subsidize your premiums. As of this publication, you will have to pay a premium to use COBRA, so review your options before making a final decision.
• If you are employed, you may be able to access health insurance benefits through your employer. A divorce qualifies as a life event. For this reason, you can sign up through your employer’s health insurance plan, even if it is not open enrollment.
• You may also be able to choose an ACA (Affordable Care Act/Obamacare) plan through your state. The premiums may be subsidized based on your income. You may need to provide documentation to verify your eligible premiums. Another benefit of an ACA plan is that they cannot refuse you based on pre-existing conditions.
• In addition, you also may be able to get coverage through a private health insurance plan. These will require an underwriting process. If you have health issues, you may be declined coverage. These plans may also not cover certain pre-existing conditions, so you need to consider this option if you have any health issues.
• Your financial advisor should be able to help or refer you to someone who can analyze and guide you to the best option based on your situation.

Social Security and Divorce

While retirement assets such as 401Ks and IRAs use court orders, family law codes, or spousal negotiations for their division, the Federal law governs SSI (Social Security Income) benefits. For this reason, they cannot be altered.

For marriages ten years or longer, a spouse can collect Social Security benefits based on the larger of their SSI benefit or one-half of the ex-spouse’s benefit at full retirement age (FRA). If you remarry, you can receive spousal benefits based on your new spouse but not your ex-spouse. If a spouse dies, an unmarried ex-spouse may be eligible for spousal benefits. Always check for the current rules and maximum benefit ages before making final decisions.

Spousal Support

While Child Support Guidelines are established, the same is not true for Spousal Support eligibility. Spousal Support can be determined by a family law judge or negotiated by both parties.

A judge will look at a variety of issues.
Examples include:

• Age
• Income (and the ability to work)
• Stay-at-home status
• Living expenses for both parties
• Net worth (separate property assets)
• Health status

In addition, the court will consider other factors to determine the appropriate amount of Spousal Support. If the higher-earning spouse is near or in retirement, the judge may not award Spousal Support to the lower-earning spouse, so plan accordingly.

In some states, Spousal Support can be categorized as modifiable or non-modifiable. As the title reflects, Modifiable Spousal Support allows the courts to maintain jurisdiction over the agreement. However, a non-modifiable Spousal Support agreement cannot be changed for any reason. If a court has jurisdiction, either spouse can ask the courts to review the terms due to a change in their financial circumstances. Examples include a disability, job loss, or increase in revenue.

Tax Considerations for Divorce and Retirement

The U.S. tax code dictates your filing eligibility based on your marital status on December 31st of the tax year.

If, on December 31st, you are still married, your filing status can be either Married-Filing Joint or Married-Filing Separate. However, if your divorce is finalized by December 31st, your filing status may be Single or Head of Household (if you meet the qualifications).

Understanding your tax filing status is important. This will provide the foundation to determine if and when to take withdrawals from retirement assets, capital gains assets, or cash to minimize taxes and provide you income to cover expenses. An effective retirement income strategy provides a balance between managing your income and investments and optimizing your tax planning.

Divorce and Retirement Equalization

Community property and marital assets are generally divided 50/50.

For instance, let’s say that one spouse owns $1,000,000 in retirement assets, and the other spouse owns $500,000. The spouse with the higher balance will transfer $250,000 to equalize the value, and both partners will end up with $750,000.

It is important to note that assets do not need to be divided like-for-like. For instance, one spouse may waive rights to the home equity and instead receive their share from a retirement or investment account. This can work when one party wants to keep the family home and the other prefers retirement or investment accounts.

For this to work, there are several considerations for these exchanges. While real estate provides a place to live and is a real asset, it is not liquid. Considering your ability to pay the mortgage and maintenance is critical, especially if you are on a fixed income.

Assets such as retirement accounts, pensions, and some annuities are funded with pre-taxed dollars and treated as ordinary income. Real estate and stock brokerage accounts are capital gains assets that usually enjoy a lower tax effect than ordinary income sources. When negotiating equalization of non-like-for-like assets, work with a qualified financial or tax advisor who can help you consider the after-tax value and what will work best for you.

If you have questions or need support, click here:

Summary – “Divorce and Retirement”

There are many options and considerations before, during, and after a divorce. In addition, it is often one of the most stressful and overwhelming experiences of a person’s life (even if they want a divorce). In addition to the emotional stress, you often must make life-changing decisions that impact your and your family’s finances and life. As you approach retirement age, you may not have the time to make significant changes. These decisions are critical because they are a determining factor in your long-term financial situation.

For this reason, it is essential that you get emotional, financial, and legal support. Creating a team of qualified and compassionate professionals will help ease the stress and empower you to make the best decisions for you and your family.

A Certified Financial Planner (CFP®) or Certified Divorce Financial Analyst (CDFA®) can provide models to help you determine your divorce settlement’s short-and long-term financial impact. These professionals are well-versed on the topics and issues regarding your divorce and retirement and can help you make the best decisions for your situation.

If you have questions or are planning a divorce, download our free guide: