How to Protect Your Retirement Funds and Pension in Divorce?

Pensions and taxes after divorce

Individuals headed for divorce need to know that their retirement funds, including pensions, may be declared marital property and be subject to asset division during a divorce. If you do not understand how to protect your pension in a divorce, it could cost you tens or hundreds of thousands of dollars in the years ahead.

It is crucial that you take into account the division of your pension or other retirement funds as part of a divorce. Your ex-wife or husband may be able to claim a portion of your pension years after you were divorced if you do not address the issue in your separation agreement.

At Charles R. Ullman & Associates, our divorce attorneys can help you consider the status of pensions and retirement funds as you go through a divorce in North Carolina. We will work to protect your financial interests and seek a fair division of marital property such as pensions, IRAs, and 401(k) accounts.

What Happens to My Pension in a Divorce?

When divorcing in North Carolina, a couple must come to an agreement on an equitable division of the assets that they have acquired during the marriage. Marital assets include money, retirement accounts, stock options, real estate, and other valuable property acquired during the marriage.

If the couple cannot reach an agreement, the judge who presides over the divorce will decide how to divide the assets. It is better for the couple to negotiate a plan that preserves the full value of pensions and other retirement funds. Cashing out a retirement account early can trigger tax penalties.

Depending on an individual’s age and work background, he or she may have several tax-deferred accounts that make up their retirement assets. If only one spouse has retirement accounts, the other will surely claim a share of them as part of the divorce agreement.

Pension plans are known as defined-benefit plans because they promise a set amount of retirement benefits periodically for life. Some employers including the military, the State of North Carolina, local governments, and public school systems provide pensions to employees who work long enough to vest in the system. Rather than pensions, most employers today offer defined-contribution plans, such as 401(k)s, which give employees an opportunity to invest a portion of their wages into a tax-deferred retirement account. The employer may match part of the employee’s investment with contributions to the fund.

Is it possible that my pension will be divided as part of our divorce settlement?

Many people ask this, and the typical response is, “It depends.” Assets accumulated during a marriage are often subject to division in a divorce. Therefore, if contributions were made to your pension during your marriage, there’s a chance your spouse could be entitled to a portion of it, specifically the part that was accumulated during the time you were married.

Is My Wife Entitled to Half of My Pension After Divorce?

How a pension is split up during a divorce is influenced by different elements such as the laws of the place where the divorce is being processed and the unique aspects of the case. It’s a common practice for pensions to be looked at as part of the marital assets which may be divided in the course of the divorce. Nevertheless, it’s not always a strict 50/50 split. The precise share or sum that each party receives from the pension may hinge on various criteria that the court takes into consideration.

If a spouse was vested in a pension program when the couple married, those funds may be considered separate property. This means they would not be included in the division of assets. But any increase in value of that separate property during the marriage might be considered marital property.

For example, an employee may become one-third vested in a company’s pension program at 5, 1=of service. If the employee stayed with the company for 15 or more years, he or she would be 100% vested in the pension fund. But if they married after they had been with the company for five years, one-third of their pension was earned outside of the marriage and should qualify as separate, non-marital property not subject to division in a divorce.

In such a case, attorneys for each spouse would need to establish the overall value of the pension, and then two-thirds of that amount would be subject to division between the spouses.

A fair division may be to give the ex-spouse half of your pension (or half of the two-thirds considered marital property). An equitable division of marital property looks at all of the couple’s assets and debts. There may be other assets of similar value to give up to retain your pension. An experienced divorce attorney can help you value your marital assets and understand what the court is likely to agree to as an equitable division of assets.

How to Protect Your Pension in a Divorce

Part of the work you must put into your divorce before you start negotiating a separation agreement is to understand how your pension plan and other retirement funds work. When your attorney asks for a list of assets, it is partly so they can get started understanding your financial situation.Dividing Pensions and Retirement After a Divorce

Determining the value of pension plans at present and during the years ahead is complicated. We will need to evaluate the payment options that provide the best benefit to you. But there are special formulas to be applied for valuations and divorce attorneys regularly dissect pension plan rules.

A pension plan must offer married employees a 50% joint-and-survivor annuity designed to provide a joint benefit while both the retiree and spouse are alive and half of that amount to the spouse upon the retiree’s death.

A plan may give retirees the option to take a single lump-sum payment, rather than a periodic annuity. The lump sum would equal the amount that must be invested to produce a lifetime of payments based on life expectancy and investment return assumptions. There are also other options that a pension plan may offer, such as a pop-up provision, which increases the annuity payment upon the death of the spouse; or a level income option, which provides a greater benefit prior to receipt of Social Security and a lesser benefit once Social Security payments begin.

The pension benefits for most public employees in the state of North Carolina are administered by the North Carolina Retirement Systems (NCRS). NCRS features two major plans— one for teachers and state employees, and one for local government employees.

It’s important to understand how a pension plan works. It affects how the pension proceeds may be divided in a divorce. Payment options may be available, or the pension owner and their spouse may be subject to whatever the employee chose when they signed up.

Instead of dividing the pension, spouses might agree to such alternatives as:

  • Trading an asset of equal or similar value, such as the pensioned spouse’s stake in the family home.
  • The purchase of life insurance equal to the pension benefits with the ex-spouse named as the beneficiary on the policy. In return, the spouse would waive the pension survivor benefit.

If both spouses have retirement accounts of relatively similar value, they may simply agree that each of them will keep what they’ve earned.

Another factor to consider when divorcing is that an individual may be entitled to collect Social Security spousal retirement benefits based on a former wife’s or husband’s earnings record. Click through to read more about Social Security benefits and divorce.

Contact an Experienced N.C. Divorce Attorney for Help

To ensure the pension you have earned is preserved after a divorce or that you receive your fair share of a spouse’s pension, consult an experienced North Carolina divorce attorney to discuss the equitable distribution of pensions.

As your divorce attorneys, Charles Ullman & Associates will discuss your goals with you and advise you so that your rights and financial interests are protected. Contact us in Raleigh, NC, today for an initial consultation about how we can assist you.


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