Preserving Your Retirement

by Richard J. Coffee, II,  Cordell & Cordell, P.C.

The dissolution of a marriage presents numerous changes and unfortunate consequences.  Custody issues may be resolved by compromise, mediation and/or counseling.  The personal property division may be an irritating inconvenience.  Financial support a current cash flow adjustment.  None of these are insignificant. However, the loss or division of retirement financial security may be the one impact of divorce that can be the most crippling.

The degree that a divorce will impact your retirement depends upon the laws of your state, the duration of your marriage, the types of retirement benefits involved, and your wife’s retirement accounts.  While the specifics in any given situation require consultation with your legal counsel, some background information may aid you in understanding what is, and is not, at issue.
For many Americans, a key component of their retirement planning is anticipation of receiving Social Security benefits.  By Federal law, Social Security benefits are not subject to division in a divorce.  However, your wife may be entitled to claim spousal benefits from Social Security as provided by the laws and rules governing the program.

Other retirement programs backed by the United States government, such as the Railroad Retirement Board and military retirements, are only divisible in part.  Railroad Retirement consists of two tiers with the first tier exempt from division.  Only the “disposable retired pay” of a military retirement is divisible.  Veterans’ administration disability benefits are not divisible.   As to the portion of military retirement benefits that are divisible, the Uniform Services Former Spouses Protection Act only allows direct payment to a former spouse if the parties were married for 10 years while the military member is in the service.  While the military may only divide for direct payment to ex-spouses up to 50% of the disposable retired pay among all obligations, any amount over 50% divided by court order may be enforced by other collection methods.   For military  members married while in service less than 10 years, the benefits may still be divided in the divorce with the retired spouse making payments directly to the ex-spouse.

The division of State and local government retirement benefits are governed by State pension and divorce laws.  Division and/or direct payment to former spouses of such benefits may be prohibited or limited.  The nature of the benefit, such as traditional pension or deferred compensation may also affect the divisibility of the benefit.

Current retirement investments, such as 401(k) or IRA finds, are generally divided at the time of divorce, while deferred plans such as traditional pensions may not be divided until retirement.  Some deferred plans will allow for a separate account to be created for the ex-spouse to draw upon in her own right, while others will only allow for a division of the amount paid to you when you retire.

When retirement funds are divided in a divorce, the ex-spouse is liable for the income taxes on any amounts paid out directly to her by the retirement fund, but the 10% early withdrawal penalty does not apply.  If funds are not paid directly by the retirement plan and you have to pay her directly, you may end up paying the taxes on the full amount and should have the net tax impacts included in the calculations of how the accounts are divided.   The tax brackets of each party, the graduated taxation on Social Security benefits, and other tax consequences may mitigate against a greater award if the net result is higher taxes and not a significant amount of additional cash for the ex-spouse.

When confronted with the potential division of your retirement plan, you may have opportunity to negotiate tradeoffs of current assets in exchange for keeping future retirement benefits or exchange non-taxable assets for 401(k) or IRA accounts.  If your wife has, or has potential to acquire, her own retirement benefits she may be interested in current tax-free assets in lieu of waiting for you to retire or instead of her cashing out taxable retirement investments.   If both parties have retirement accounts and will continue to acquire retirement benefits, you may be able to settle on each party keeping their own retirements or making adjustments in other property to offset any disparity in the retirement accounts.  You may need to have an accountant, actuary, or the retirement plan provide calculations as to the benefits payable and the present value of future benefits to evaluate reasonable tradeoffs.

The best method of protecting your retirement plan is a pre-marital, or perhaps even a post-marital, agreement depending upon the laws of your state on such agreements.  Retirement plans are generally treated as property, the division of which may controlled by such agreements.  However, any avoidance of retirement income to your spouse may increase her ability to obtain spousal maintenance, if warranted under the laws of your state, so a careful review of all aspects of the finances by your legal and financial advisors is recommend prior to pursuing a pre-marital or post-marital agreement.


Richard Coffee is a Senior Attorney in the Belleville Illinois office of Cordell & Cordell.

Mr. Coffee is an experienced divorce attorney whose practice is devoted to domestic litigation. He is licensed in the State of Illinois and is admitted to practice law in the U.S. District Courts for Northern, Central and Southern Illinois.
Mr. Coffee has extensive domestic litigation trial experience representing clients in courts throughout Illinois on all aspects of domestic litigation, including the representation of clients who are current or retired military personnel with issues under the Soldiers and Sailors Civil Relief Act and the Uniformed Services Former Spouses’ Protection Act, clients involved in state court jurisdictional disputes due to the relocation of one or both parties from or to Illinois, and clients with government or private pension benefit valuation and division issues.  Read more…

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One comment on “Preserving Your Retirement

    Excellent article. I like the way you discuss how divorce affect the retirement benefits. Somehow, it is often overlooked by couples who separated only to discover later on that they have to deal with this kind of problem. A mutual agreement on both parties is always beneficial.

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