We never know what might happen after marriage. But when a marriage ends, the retirement savings are split between both spouses. And if one spouse is a federal employee or a military service member, the Thrift Savings Plan (TSP) may need to be divided between both spouses.
There are five main ways TSP funds can be transferred after divorce. The best option depends on what the court order says and what your long-term financial plans are.
A TSP and divorce case requires a special court document called a Retirement Benefits Court Order (RBCO). Without a valid RBCO, the TSP will not release any funds to the former spouse. Once the order is approved, you can choose how you want to handle the transfer.
Let’s explore the top five options in this detailed guide:
Option 1: Direct Transfer to the Former Spouse’s TSP Account
In this option, if the former spouse is also a federal employee, the funds can be moved directly into their own TSP account. This is the simplest and most efficient option.
Because the transfer stays inside the TSP system, no taxes are withheld at the time of the move. The money continues to grow tax-deferred. In most cases, this helps both parties protect the value of the retirement funds since nothing is reduced by immediate taxes.
Option 2: Transfer to an IRA in the Former Spouse’s Name
Another option is where the allocated funds can be rolled over into an Individual Retirement Account in the former spouse’s name. This is one of the most popular options because it gives the receiving spouse full control over how the money is invested.
As long as the money goes directly into an Individual Retirement Account (IRA), no taxes are deducted at the time of the transfer. The former spouse can choose
- A traditional IRA to keep the tax-deferred status or
- A Roth IRA through a Roth conversion that requires paying the income taxes.
Option 3: Transfer to Another Eligible Retirement Plan
The third option is, if the former spouse has a 401(k) retirement savings plan, the TSP funds can be rolled into that account instead. This is a good option for someone who wants to keep their retirement savings in one place and manage it through a single plan.
As long as the transfer is done as a direct rollover, no taxes are withheld. There is a catch though. Not every workplace plan accepts rollovers. So, it becomes important to confirm with the plan administrator before choosing this option.
Option 4: Direct Payment to the Former Spouse
Choosing this option, the former spouse can also take the TSP money as a cash payout instead of moving it into another retirement account. This gives quick access to the funds. This may help with:
- Bills
- Debt
- Expenses after divorce
But you have to understand one thing: this can be expensive. The TSP will automatically withhold 20% for federal taxes. The former spouse may owe even more taxes later.
However, there is no early withdrawal penalty because the payment is made under a court access.
Option 5: Leave the Funds in the TSP Temporarily
In some divorces, the court order may give the former spouse a share of the TSP but allows the money to stay in the account for a certain period of time. This is used when the account holder is not yet retired.
The former spouse’s portion continues to grow alongside. But the former spouse can’t access the money right away.
This option works well if the Retirement Benefits Court Order (RBCO) is written very clearly and the former spouse’s share is properly defined.
How to Choose the Right Option
The best option to choose depends on the former spouse’s needs and long-term plans. If they need money immediately regardless of tax deduction, then direct payment may be helpful.
But if the goal is to protect the money, then rolling it into an IRA, a 401(k), or another retirement plan is usually the smarter choice.
TSP divorce transfers follow strict federal rules. This is why working with a family law attorney who understands how these benefits work would be helpful. Because a small mistake in the court can delay the transfer and reduce the amount received.
Also, getting the paperwork right the first time saves a lot of your time, money, and stress.
Key Takeaways
- If a marriage ends in divorce, it’s important to know the options for transferring TSP funds.
- The first option is directly transferring the money to the former spouse’s TSP account.
- Another option is where the allocated funds can be rolled into an IRA.
- You can also transfer the funds to a 401(k) retirement or another eligible retirement plan.
- The fourth option is the former spouse can take direct payment as cash instead of moving it into another retirement account.
- The final option is to leave the funds in TSP. This option is preferred when the account holder is not yet retired.
Contributed posts are advertisements written by third parties who have paid Woman Around Town for publication.
