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Separation and Divorce

Used with permission from The United States Securities and Exchange Commission. 

Separation and Divorce

Few things are as stressful and complicated as a divorce. It is a time of enormous transition. Your finances are one of the things that could change significantly. There are many issues to consider, from spousal support to dividing marital assets. If you have children, there are even more issues to resolve.

Here are a few things to consider:

  • If you have joint accounts, you will need to close them and open new ones in your own name.
  • Gather your financial records. Make a list of all your joint assets and debts.
  • Create a financial plan. How are you going to support yourself during this time of transition? How much money do you need to live on for the next 12 months?
  • Pay the bills.
  • Update your will and make any needed changes in designating insurance beneficiaries.
  • Understand how your assets will be divided, including your retirement plan assets.

Qualified Domestic Relations Orders (QDRO)

A Qualified Domestic Relations Orders (QDRO) is a court order used to divide assets in an employer-sponsored retirement plan. While state law generally governs the division of marital property, any division of retirement funds also must comply with the Employee Retirement Income Security Act (ERISA) and federal tax law.

If your spouse is covered by a defined contribution plan, such as a 401(k) plan, the timing of any distribution to you will depend on that particular plan. Some make an immediate lump sum payment, while others pay a lump sum or make periodic payments in the future. If your spouse is covered by a defined benefit plan, such as a company pension plan, any distribution to you would come as monthly payments starting at your normal retirement age.

Government Thrift Savings Plans (TSP)

QDROs do not cover military or federal government retirement savings plans, which require a separate court order. A retirement benefits court order regarding the division of these accounts may be issued at any stage of a divorce, annulment, or legal separation proceeding. The court could award a specific dollar amount or percentage of the account to your current or former spouse, or to your dependents, as of a specific past or current date.

In such cases, the court will require the TSP to freeze the account, preventing any loans or withdrawals until the award is paid out or the order is otherwise resolved. A freeze of your TSP account will not prevent you from making contributions or changing how your contributions are allocated, and you will still be required to make payments on existing loans.