What Happens to My THRIFT Savings Plan in Divorce?

What Happens to My THRIFT Savings Plan in Divorce?

South Carolina is home to a lot of military bases, especially for a relatively small state. We have two major initial recruit training centers – Parris Island for Marines and Fort Jackson for the Army. With so many military personnel living in the state, a common question often comes up in divorces: what happens to thrift savings plan in divorce? While there is never an easy answer to these questions, you do have some options. First, it’s important to know what a thrift savings plan (or “TSP”) is and how it differs from other types of retirement plans.

What Is A TSP?

Just like a private 401(k), the TSP offers a tax-deferred savings option for retirement. If you take it out early, you face steep tax penalties that can erode much of your retirement savings, effectively destroying any benefit you may have earned. One notable difference, however, is that most military service members do not receive an employer match the way private sector folks often do. On the other hand, the TSP has much lower fees and expense ratios, so in general, your TSP can grow a bit quicker in the long run, if managed well.

New Laws Broaden Your Ability To Withdrawal After Leaving The Military

The TSP Modernization Act of 2017 was signed into law by the President in November of last year. The Act greatly broadens your ability to make multiple withdrawals after leaving the service, and it even allows former military service members to opt to stay in TSP longer than before. If you are getting divorced, be sure to check into these new rules to see how they might affect your long-term goals.

Your Options In A Divorce

If you’ve been married a short time and you and your spouse are young enough, a judge may decide it’s wiser to leave the retirement money where it is and just have you divide other assets – perhaps with a bit of an offset based on the money you are not dividing from your TSP.

However, a judge may decide to split or portion out a thrift savings plan in divorce scenarios involving couples that have married for a longer period of time. This is also typically the case when your spouse does not have significant savings built up for retirement. If this describes your divorce situation, you will need to draft a “Qualified Domestic Relations Order,” which directs the TSP administrator to make the partial withdrawal payment.

What About Taxes On Early Withdrawal?

Fortunately, your spouse can easily roll the funds over into a private 401(k) or Traditional IRA. So long as your spouse does not elect to take the money as a cash-out withdrawal, he or she would not lose the tax protections of the retirement account.

What Happens While We Work To Agree On Division Of TSP?

Divorce cases don’t always go smoothly. Sometimes they can take a long time to resolve. The judge will freeze the TSP and not allow any withdrawals until a court order is entered. An experienced South Carolina divorce lawyer can help you with properly drafting the necessary documents for dividing a TSP.  The TSP administrator offers a detailed handbook explaining some of the general rules and procedures, but the plan administrator cannot give you legal advice.

Help With Military Divorces In Mt. Pleasant, SC

If you are currently going through a divorce while serving in the Armed Forces, whether on active duty or in the Guard or Reserves, make sure you contact a divorce lawyer who understands military and veteran law.  From normal separation paperwork to the proper handling of a thrift savings plan in divorce, you need experience on your side every step of the way. Klok Law Firm LLC offers full-service family law legal services to families throughout the region. Contact us to learn more today.