Retirement funds are often at stake when long-term marriages end

Divorces involving long-term marriages often lead to unique financial challenges, especially when deciding what to do with retirement funds.

Marriages that have lasted for decades can lead to difficult financial questions

As U.S. News & World Report recently noted, long-term marriages are increasingly coming to an end in the U.S., giving rise to what has been called “gray divorce.” With many people divorcing later in life, the question often inevitably arises about how they are going to fund their retirements. It is no secret that divorce can have a serious financial impact on those who go through it and that the financial stakes are often much higher for those approaching retirement. However, by understanding how retirement funds are treated in divorce, those involved in such later-in-life divorces will be better prepared to deal with the challenges before them.

Retirement funds

Retirement funds, as with the rest of a couple’s property, can usually be divided between both spouses. This division also applies to pensions, including those pension plans sponsored by an employer. Even if the pension plan is only in the name of one spouse, the other spouse can still usually claim half of the pension benefits.

However, as the Pinecrest Tribune points out, pension plans do differ from other marital assets by the fact that they usually require a legal document called a Qualified Domestic Relations Order (QDRO) in order to be divided between both spouses. A QDRO is not just a formality, as it can ultimately help those involved in a divorce avoid paying income tax on funds that are transferred from a pension plan from one former spouse to another.

To divide or offset?

While retirement funds can usually be split between both spouses, in many cases a former spouse will choose to offset his or her share of the retirement funds with another non-retirement-related piece of the couple’s property. In cases where one spouse wants to hold onto the marital home, for example, they may give up their share to the retirement accounts. Alternatively, while alimony is often granted after long-term marriages, such alimony may be waived in exchange for a greater share of the couple’s pension.

Choosing whether to divide or offset one’s share of the retirement funds requires careful planning and knowledge of potential consequences. Giving up the pension in order to keep the home, for example, can lead to serious financial challenges in the future. Not only are real estate values less secure than pension benefits, but they are also often subject to higher tax penalties than pensions are. The same is also often true of alimony payments, which is subject to income tax.

Legal advice

While many people understand that divorce will have financial implications, they often fail to realize how seemingly minor decisions during divorce can have significant consequences later on. When going through a divorce, it is important to reach out to an experienced family law attorney. With expert legal advice, people dealing with the end of a marriage will be better equipped to handle these financial challenges and better protect their future retirement.

Keywords: divorce, retirement, assets, property