Divorce at any age can temporarily impact your financial situation. However, those who get divorced later in life have less time to repair their retirement savings than those who divorce when they are younger. This focus on financial stability during later years is just one way in which gray divorce is unique.
As someone who is approaching or already in retirement, you probably are not worried about things like child custody or support. Instead, finances will likely be your chief concern during divorce, with retirement topping the list. Here are a few things to keep in mind when dealing with your retirement savings during a divorce.
What kind of retirement account do you have?
The rules for dividing retirement accounts during divorce depend on what type of retirement account or accounts you have. There are three types of accounts that you might be working with during the property division process. You might have one or more of the following:
When splitting an IRA, you have to specify the terms of the split in your divorce agreement. To avoid incurring any taxes, the agreement must specify either a dollar amount or percentage of the IRA to transfer to the other spouse’s IRA, using a direct trustee to trustee transfer. You will have to pay taxes if you take cash from the trustee to trustee transfer or take a distribution instead of a transfer, and you will also pay a 10% penalty if you are younger than 59 and a half.
Qualified domestic relations order
Qualified domestic relations orders — QDROs — are documents used to divide 401(k)s and pensions without incurring taxes or other penalties. It is generally easier to divide a 401(k). With a QDRO, the specified funds from one spouse’s 401(k) would directly transfer to the other’s retirement account.
Pensions are a little more complicated, especially if the spouse whose employer-sponsored the pension is still working. Employers all have varying rules regarding the splitting of pensions. If planning to split future pension payouts, it is often helpful to have a professional calculate future benefits.
Just like it can be hard ending a decades-long marriage, it can also be difficult to let go of your original vision for retirement. The retirement funds you saved up to support two people in one household will not necessarily stretch as far once divided for two people in separate households. Of course, you may still be able to rebuild some of those savings, but managing your expectations can be helpful for focusing on the task at hand during a divorce.
Gray divorce certainly has its own unique challenges. However, this does not mean that it is an impossible task. Many unhappy couples in Tennessee have found that divorcing later in life has helped them achieve fulfillment in their personal lives. Learning as much as possible about the process before getting started may still be useful, though.