Clearing Up Misconceptions About Thrift Savings Plans & Divorce

Let's start with the basics. When it comes to retirement accounts, there is a wide array of options available - from the popular IRAs, ROTH IRAs, and 401(K)s, to numerous other lesser-known plans. With so many choices, it can be overwhelming for individuals who are not dealing with them on a daily basis. It's crucial to understand that not all retirement assets are created equal, and they should not be treated as such. That brings us to the focus of this blog post - the Thrift Savings Plan, commonly referred to as TSP.

What is a Thrift Savings Plan (TSP)?

If you have been working for the Federal government or the military for much of your career, you may already be very familiar. However, those in the private sector may not be. The Thrift Savings Plan (TSP) is a retirement account. It is available to civilian federal government employees and members of the uniformed services. If you are familiar with a 401(K) in the private sector or a Deferred Compensation account for state employees, it is similar.

For civilian federal employees, the Thrift Savings Plan supplements the Federal Employee Retirement System (FERS) pension benefit. Military members can participate to supplement their military retired pay. While it is a defined contribution plan that is similar to a 401(K) plan, there are some big differences. For example, it is not governed under the Employee Retirement Income Security Act of 1974 (ERISA). I'll discuss more about what that means in a minute.

Thrift Savings Plan accounts can be pre-tax, post-tax (ROTH), or both. 

This means you can choose to contribute money from your paycheck before taxes are taken out or after taxes are taken out. The advantage of pre-tax contributions is that they reduce your taxable income for the year, potentially lowering the amount of taxes you owe. However, when you withdraw money from a pre-tax TSP account in retirement, it will be subject to income tax.

On the other hand, post-tax contributions (ROTH) do not provide any tax benefits now, but the account grows tax-free, and withdrawals in retirement are tax-free. This can be advantageous if you expect to be in a higher tax bracket during retirement. It's important to note that there are limits on how much you can contribute to each type of TSP account per year.

When it comes to a TSP and divorce, it's important to know the tax status of the account you are negotiating. Keep in mind that a portion could be pre-tax, and a portion could be post-tax. It's also important to know whether or not there is an outstanding loan on the account. 

Thrift Savings Plan & Divorce: 5 Tips

For many couples and individuals dealing with a Thrift Savings Plan and divorce, I have seen several misconceptions. These tips are designed to clarify some of the common misunderstandings.

#1 A Thrift Savings Plan can be divided in a divorce

There is a good bit of confusion about who "owns" a retirement account when it comes to divorce. While retirement accounts are only in one person's name, the money contributed to and earned in the account during the marriage is considered part of the overall marital estate. It is divisible in a divorce. This includes money contributed to and earned in a TSP account.

That doesn't mean that you have to divide the account. You may find that it makes more sense to offset the account with other retirement assets. Alternatively, you may decide it makes sense to offset the account with other non-retirement assets. The point is that the account can be divided or awarded in its entirety to the other spouse if that is what you negotiate as your settlement.

#2 A specific dollar amount or percentage of the TSP account can be awarded in a divorce

When negotiating the division of a TSP account, you can negotiate it in absolute dollars (such as $150,000 being awarded from the TSP) or by percentage. In percentage terms, an example would be 50% of the account is awarded. We recommend negotiating in terms of percentages as TSP accounts are invested and will fluctuate with normal market volatility. We've written in greater detail about the risks associated with negotiating in absolute dollars in the past, and you can read about that here.

#3 Thrift Savings Plan accounts are maintained separately for civilian federal employees, military members, and beneficiaries.

Some participants have more than one type of TSP account. Be sure that each is clearly identified in all relevant court orders. When I am working with clients who have several outstanding accounts, I find that there is often a lot of confusion around this issue. Even if you have several accounts with the same institution, make sure that each individual account is identified and valued separately when negotiating the division of assets.

#4 Necessary TSP information is available to spouses

If you require further details regarding your spouse's TSP (Thrift Savings Plan) account, it is recommended to submit a written request. Spouses, along with their attorneys, have the ability to obtain various information, including the participant's account balance, outstanding loan balance, as well as quarterly or annual statements. However, it is important to note that the TSP maintains strict confidentiality and does not disclose personal information such as address or social security number to ensure privacy and security.

Written requests should be directed to:

TSP Legal Processing Unit
P.O. Box 4570
Fairfax, VA 22038-9998

Faxed requests should be sent to 866-817-5023.

#5 QDROs are not used to divide TSP accounts

Qualified Domestic Relations Orders (QDROs) play a crucial role in dividing private retirement accounts governed under the Employee Retirement Income Security Act (ERISA). However, it's important to note that the Thrift Savings Plan (TSP) operates independently from ERISA and has its own distinct requirements for court orders to divide the account. These requirements can be found in 5 U.S.C. §§ 8435(c) and 8467, as well as 5 C.F.R. part 1653, subpart A. Unlike a QDRO, the TSP recognizes a Retirement Benefits Court Order (RBCO) as the appropriate mechanism for division.

While the Thrift Savings Plan does not review the draft of a Retirement Benefits Court Order, they do provide sample language to guide individuals in the process. For further information on this topic, please refer to the publication provided by the TSP.

It's worth noting a small yet significant tip: when issuing a court order, it is crucial to explicitly identify the account as a Thrift Savings Plan. Terms such as "Thrift Savings" or "Thrift Savings Account" may not be considered accurate or sufficient in this context.

For more detailed information about the TSP Plan and divorce, take a look at this publication by the Thrift Savings Plan Investment Board. 

Consider each asset in the context of your overall plan

There are several important factors to take into account when it comes to dividing assets in a divorce. One such consideration is the level of liquidity that is important to you. Assessing the after-tax value of each asset is also crucial in making informed decisions. Additionally, you may need to weigh the potential for capital growth against the value of a guaranteed income stream. Furthermore, it is essential to take into consideration the death benefits associated with each asset.

It's important to recognize that each asset comes with its own set of advantages and disadvantages. To effectively evaluate the assets, it is advisable to begin by identifying your personal financial goals. Once you have a clear understanding of what you aim to achieve, you can thoroughly assess the pros and cons of each asset. By taking all these factors into account, you will be better equipped to determine the most suitable division that aligns with your unique circumstances and objectives.

We Can Help

If you need assistance determining how best to divide assets in your case, you are not alone. Going through a divorce can be emotionally overwhelming, as it involves making major financial decisions like dealing with retirement savings that can have a lasting impact on your future. However, it's important to approach these decisions objectively and with a clear understanding of the financial implications. That's why I encourage you to work with our Certified Divorce Financial Analysts (CDFAs), who have undergone advanced training in all aspects of the financial complexities of divorce. Our CDFAs are equipped to provide you with the expertise and guidance you need to navigate the process and ensure the best possible outcome that meets your unique needs and goals.

FAQs 

Q: What assets are typically divided in a divorce?

A: Some common assets include the marital home, retirement accounts, investments, business interests, and personal property such as cars and furniture. However, every case is unique and may have different assets to consider.

Q: How do I assess our assets' value?

A: The first step is to gather all relevant financial documents, such as bank statements, tax returns, and mortgage information. Then, you can work with a Certified Divorce Financial Analyst (CDFA) or use online resources to determine the current value of each asset.

Q: Factors to consider when dividing assets?

A: When dividing assets in a divorce, it's important to consider not only their monetary value, but also factors such as emotional attachment, future financial needs, and the best interests of any children involved. Seeking guidance from a legal professional can help ensure a fair and equitable division of assets.