Dividing retirement benefits in a divorce is a tricky and complex process. The first thing to do is to determine whether the retirement plan is qualified or non-qualified.
A qualified retirement plan meets certain requirements in order to receive tax benefits not available to other types of plans. These plans may be structured so that the plan is part of an employer’s retirement benefits package, or they may be independent of an employer plan. The qualified plan may accept tax deductible or non-deductible contributions. If the contributions are tax deductible, then all withdrawals from the plan are taxable. If the plan contributions are non-deductible (as is the case with Roth accounts), the withdrawals are normally tax-free. Regardless, all plans allow for tax-free buildup inside the plan.
Non-qualified retirement plans fail to meet IRS guidelines for qualified retirement accounts. These plans accept only non-deductible contributions. Money is taxable to the employee when it is received. All money that grows inside the plan is tax-free, however. An example of this type of plan is an annuity. Annuity contributions are always made on an after-tax basis, and gains are taxed when withdrawn from the plan.
QDRO stands for Qualified Domestic Relations Orders. It is a judicial Order entered as part of a divorce or legal separation that splits a retirement plan or pension plan. QDROs apply only to employee benefits or pension plans subject to the Employee Retirement Income Security Act (ERISA). These are typically qualified plans that meet the ERISA standards as discussed above. Examples of plans that do not meet the ERISA standards include the Federal Retirement Plans (the CSRS, FERS, TSPs, and IRAs). Some of these types of accounts can still be divided, but will not require a QDRO.
Your TSP Account May Be Divided
A valid retirement benefits court order to divide your TSP account may be issued at any stage of a divorce, annulment, or legal separation proceeding and may have the following effects on your account:
• It may be awarded to your current or former spouse, or to your dependents, a specified dollar amount – or a portion of your account – as of a specific past or current date.
• It will require the TSP to freeze your account, preventing you from taking any loans or withdrawals until the award is paid out or the order is otherwise resolved. (However, a freeze will not prevent you from making contributions or changing your contribution allocation or investment choices. Also, you will still be required to make payments on existing loans.)
Make sure that your TSP account will be awarded according to your wishes in the event of your death.
If you submit a Designation of Beneficiary form, the TSP will honor only beneficiaries named on that form.
If you submitted Form TSP-3, Designation of Beneficiary (formerly TSP-U-3 for uniformed services members), and designated your spouse as your beneficiary, your account will be paid out to that spouse when you die, even if you are separated or divorced from that spouse or have remarried. The TSP will not honor a will, a property settlement agreement, separation agreement, or court order when distributing your TSP account.
IRAs can also be divided and oftentimes rolled over into your spouses IRA through simple forms and elections, rather than complicated QDROs.
Plans that do require QDROs include 401Ks, 403Bs, and Pensions.
It is critical that you speak to a knowledgeable family law attorney to gain an understanding of your retirement accounts and how they are treated and potentially divided in the event of a divorce. So please, don’t hesitate to call us with any questions you might have!