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Dividing Thrift Savings Plans in Divorce

Do you or the spouse you’re divorcing have a Thrift Savings Plan? This is a tax-deferred retirement account for members of the military and federal employees, similar to 401k plans offered by private employers. Participants add to their accounts through regular payroll deductions and the money is placed in investment funds to grow over time.

Frequently, a Thrift Savings Plan account can be a substantial marital asset. Under family law, the account belongs to both spouses. It doesn’t matter which one is the actual plan “participant” or in other words, the one who worked where the plan was offered, set up an account and made the contributions each pay period.

The money that accumulated during the marriage is a marital asset and can be divided in a divorce. (Any contributions made before the marriage by the participant, however, are exempt and belong to the participant).

Here is just some of what you’ll want to consider:

Always follow through

The federal Office of Personnel Management oversees Thrift Savings Plans and is the agency that handles division of TSPs. The agency has precise rules and this is something that you will need to follow through on if you are the “payee” who is entitled to a distribution from your spouse’s account.

I recommend that you have your attorney submit the paperwork and forms, and that you remain diligent. Even if you’re past the final hearing and are now legally divorced, don’t consider your divorce “done” until you receive the distribution. It might be easy to procrastinate in filling out paperwork, but follow-through is important.

Something to be aware of: When the OPM receives a court order for a distribution it freezes the account until the distribution is made. When forms aren’t completed properly, or a required element is missing, you have 30 days to resubmit before the agency automatically unfreezes the account. Once the account is unfrozen, the participant (your ex-spouse) is free to make withdrawals.

Know the tax implications

If you will be getting part of a TSP, be sure you understand the tax implications. If you have to pay taxes on the amount you receive, you will actually be getting less than what you may have expected in the marital settlement agreement.

For instance, you could be in for a surprise if you believed that your divorce agreement specified you would receive $50,000 from your spouse’s TSP account, only to later learn that the IRS expects you to pay 20 percent of that in income taxes. Suddenly, your marital settlement is less than you planned on.

You can avoid taxes by rolling the distribution into your own retirement account. Again, the Office of Personnel Management will require you to send in the right forms in order to do this. Otherwise, it will take out 20 percent automatically to send to the IRS.

Change the beneficiary!

If you’re the plan participant (the federal employee or military service member who contributes to the TSP), you will probably want to change the beneficiary after your divorce. Usually, people name their spouses as beneficiaries. You now have an ex-spouse – is he or she still named as the beneficiary?

This is where the TSP rules are quite strict.

Nothing overrides who is named as the beneficiary, according to the Office of Personnel Management. Not a divorce decree, even if the ex-spouse gave up all rights. Not a will. Not a pre-nuptial agreement. Not remarriage. If your ex-spouse is still the designated beneficiary, he or she will get the proceeds of the account. So change the beneficiary, if this is something you would rather not happen (i.e., you’ve remarried or want to leave the account to your children).

At the law office of Jeanne Coleman, we have practiced family law for more than 25 years and can advise you about how to achieve the best outcome in the event of divorce. We welcome you to schedule a consultation.