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What happens to retirement funds in divorce?

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Deciding what happens to retirement funds in divorce is an important process for divorcing couples to power through. As your marriage comes to an end, consider how to secure your new financial future. Whether you're approaching retirement or already retired, going through a divorce will likely affect your lifestyle and any money you've saved and invested along the way.

Let's take a closer look at what happens to retirement funds in divorce and what you should to know about what may them.

Retirement assets as marital property and state laws

Divorcing couples are generally required to agree (or be ordered by a court) to divide their assets with Court approval. But how divorce affects your finances and marital property—including your retirement accounts—depends on which state you live in.

Some states are community property states, which can mean financial assets that the couple obtained or acquired during their marriage are generally considered the equal property of both spouses. This means each half of the divorcing couple generally receives 50% of the assets. Community property states may still vary on the leeway a judge has in determining a property settlement. Today, nine states are community property states.

The other 41 states are common law states and use a legal approach to divorce called equitable distribution. This generally means the assets do not have to be split 50/50, but they should be divided in a way that is fair to both people.

Divorcing couples in common law states may want to consider working with a mediator to find a fair agreement, and a higher-income spouse may need to be prepared to give a greater share of some assets to the other, lower-earning person.

What does this mean for your retirement savings? Depending on where you live and how much money you have saved with your spouse during your marriage, you might have to part with 50% or more of your retirement savings. There is no exact, predetermined amount. Consult with a divorce attorney about your options based on your specific situation.

Dividing shared accounts, investments and other finances

Another factor in dividing up a couple's finances is deciding who keeps certain joint assets like savings and investment accounts, homes, vehicles, rental properties or small businesses. As part of a divorce, one person may need to "buy out" the other in their shared finances.

Let's say in a simplified and hypothetical situation that a divorcing couple has $200,000 in retirement savings and $100,000 of home equity in their house, for a total of $300,000 of shared marital assets. In a community property state or in a strict equitable distribution approach, the marital assets would be split, each individual retaining an equal share of $150,000.

The couple might choose to sell the house and divide the equity evenly. Or, instead, they could have one person keep the house but compensate the other partner for their stake in it by giving them an extra $50,000 in retirement savings. In that case, one person would come away with sole ownership of the home (with equity valued at $100,000) plus $50,000 in retirement savings. The other person would have $150,000 all in retirement savings. The income tax implications of the different assets are also an important consideration in property settlements.

Deciding how to divide assets during a divorce can be a complicated, emotional process. Some divorcing spouses may be reluctant to part with the family home while others may feel they're entitled to keep a larger percentage of the retirement accounts if they earned more income over the years. Some people might be willing to negotiate a more generous portion of retirement savings in exchange for a larger amount of cash or home equity or lower alimony payments.

There are no easy answers. You may want to consult with a divorce attorney to see how much flexibility you have in dividing your marital assets depending on your individual situation.

How does Social Security work after divorce?

Aspects of Social Security payments can change after divorce—your former spouse can receive Social Security benefits based on your record. But a few conditions apply:

  • You must be eligible for Social Security retirement or disability benefits.
  • You must have been married for 10 years or longer.
  • Your former spouse must be age 62 or older and not married.
  • The Social Security benefits your former spouse would receive based on their own work must be less than what they would receive based on your Social Security account.

Also, before applying for Social Security benefits based on a former spouse's record, the two people must have been divorced for at least two years. If all the conditions are met, the former spouse's benefit at full retirement age would be 50% of your full retirement amount/disability benefit.

Benefits that former spouse receives from Social Security do not have any effect on your own Social Security benefits. For example, if you qualify for $1,500 per month of Social Security retirement benefits, and your former spouse qualifies for 50% of that amount ($750), this does not change your own Social Security income—you still receive $1,500 per month.

In this way, Social Security can provide some extra retirement income for divorced spouses, even if it's been many years after the marriage ended.

Your next steps

Divorce can be complicated, costly and emotional. By getting advice from a divorce attorney and financial advisor, you can know your options and be prepared for the process.

Hypothetical example is for illustrative purposes. May not be representative of actual results.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.