Starting over after divorce: How to rebuild your retirement savings
TLDR: Rebuilding Retirement Savings After Divorce
If you stepped away from paid work to raise children during your marriage, divorce may leave you worried about lost retirement-saving years. You may be entitled to a share of the retirement assets or pension benefits your spouse earned during the marriage. You can also begin rebuilding independently through a workplace retirement plan or an IRA. Social Security is not divided in divorce, but after a marriage lasting at least 10 years, you may qualify for benefits based on your former spouse’s work record. Understanding how these income sources work together can make retirement planning feel more manageable.
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During your marriage, you may have stepped away from your career to stay home and raise the children. Your spouse’s income covered the family’s immediate expenses while their retirement plan appeared to provide security for the future. Now that you are getting divorced, retirement may suddenly feel uncertain. Where will your income come from? How can you make up for years when you were not contributing to a retirement account?
The first step is understanding that retirement is not usually funded by one source. Your future income may come from retirement assets received in the divorce, your own 401(k) or IRA, Social Security and possibly a pension or other savings. Here is how those pieces may fit together.
Understand your claim to retirement assets in the divorce
In New Jersey, the portion of retirement savings earned during a marriage is generally subject to equitable distribution, regardless of which spouse’s name appears on the account. This does not necessarily mean each spouse will receive half. Contributions made before the marriage may be excluded and the ultimate division depends on the circumstances and the terms of the settlement or court order.
Dividing a 401(k), 403(b) or certain pension plans typically requires a Qualified Domestic Relations Order, commonly called a QDRO. This separate court order instructs the plan administrator how to assign the awarded share to the former spouse. A divorce agreement by itself may not be enough to divide the account.
Depending on the plan and settlement, the recipient may be able to transfer the awarded funds directly into an IRA or another eligible retirement account. A properly completed direct rollover can preserve the money’s tax-deferred status. Withdrawing the money as cash may result in income taxes and, in some circumstances, penalties. Obtain legal and tax advice before moving or withdrawing retirement funds.
IRAs are handled differently from employer-sponsored plans and generally do not require a QDRO. However, the transfer must still be properly addressed in the divorce agreement and completed according to federal tax rules.
Understand the difference between a 401(k), traditional IRA and Roth IRA
A 401(k) is a retirement plan offered through an employer. An IRA, or Individual Retirement Arrangement, is generally an account you open independently through a bank, brokerage firm or other financial institution. You do not need an employer to establish one, although eligibility to contribute and receive particular tax benefits depends on your income and other IRS rules.
With a traditional IRA, eligible contributions may be tax-deductible. The money can grow without being taxed each year, but withdrawals are generally taxable in retirement.
Contributions to a Roth IRA are made with money that has already been taxed. There is no upfront deduction, but qualified withdrawals in retirement are tax-free. Income limits may restrict who can contribute directly to a Roth IRA.
An IRA is the account, not the investment itself. After opening one, you must choose how the money will be invested, such as through mutual funds, exchange-traded funds or other investments. A financial or tax professional can help you determine which type of account is appropriate for you.
Put compound growth to work
The basic goal of retirement saving is to contribute consistently and give the money as much time as possible to grow. Returns generated by your investments can remain in the account and potentially generate additional returns. This is known as compounding.
For example, $10,000 growing at an average annual rate of 6% would be worth approximately $32,000 after 20 years, even without additional contributions. Actual investment returns vary and are never guaranteed, but the example illustrates why starting as soon as possible matters.
In retirement, you may take planned withdrawals from your accumulated savings and investment growth. Those withdrawals can supplement Social Security, pension income and any retirement assets received through your divorce. Because withdrawals may include both earnings and principal, a sustainable withdrawal strategy is important.
Build your own plan when you return to work
When evaluating a job, consider the retirement benefits as well as the salary. If an employer offers a 401(k), 403(b) or similar plan, enroll as soon as you are eligible. Try to contribute enough to receive the full employer match, if one is offered. That match is part of your compensation and can accelerate your progress.
If you are self-employed, options may include a solo 401(k), SEP IRA or SIMPLE IRA. These plans have different contribution limits and administrative requirements, so seek advice before choosing one.
Do not delay saving because you cannot afford a large contribution. Begin with an amount you can sustain and consider scheduling automatic increases when you receive a raise. Workers age 50 and older may also qualify to make catch-up contributions to workplace plans and IRAs. Because contribution limits change periodically, check current IRS guidance.
Know how divorce affects Social Security
Social Security benefits are not marital assets that can be divided in a divorce settlement. You do not receive a portion of your former spouse’s monthly check and a QDRO does not apply to Social Security.
However, you may independently qualify for divorced-spouse retirement benefits based on your former spouse’s earnings record. Generally, the marriage must have lasted at least 10 years, you must be at least 62 and you must be unmarried. Your former spouse must also be eligible for Social Security retirement or disability benefits. If you have been divorced for at least two continuous years, you may be able to claim even if your former spouse has not yet filed for benefits.
At full retirement age, a divorced-spouse benefit may be worth as much as 50% of the former spouse’s full retirement-age benefit. If you are eligible for benefits on your own work record, Social Security generally pays your benefit first and then adds any amount necessary to bring you up to the higher divorced-spouse benefit. Claiming early can permanently reduce the monthly amount.
Receiving a divorced-spouse benefit does not reduce your former spouse’s benefit or the benefit of their current spouse. Different rules apply to divorced-survivor benefits if a former spouse dies, including rules concerning remarriage.
Create a “my Social Security” account or contact the Social Security Administration for an estimate based on your specific circumstances.
Rebuild around your new financial life
After divorce, your income, housing costs and responsibilities may all change. Create a realistic budget that treats retirement savings as a regular monthly obligation, not simply whatever is left over. Maintain an emergency fund so an unexpected bill does not force you to withdraw retirement money prematurely.
Review the investments and beneficiary designations on every account. Divorce does not automatically update all beneficiary forms and some changes may be restricted while the divorce is pending.
Most importantly, do not measure your progress against the balance you think you should already have. Retirement planning after divorce is about bringing together all available resources: your share of marital retirement assets, new workplace or IRA savings, investment growth, Social Security and any pension or other income.
Protect your future during the divorce process
Decisions made during divorce can affect your financial security decades later. An experienced New Jersey family law attorney can help identify marital retirement assets, address QDRO or other transfer requirements and negotiate a settlement that recognizes both spouses’ contributions, including years devoted to unpaid care at home.
If you are divorcing after time away from the workforce, contact Weinberger Divorce & Family Law Group to discuss protecting your share of marital assets and preparing for the next chapter of your financial life. Safeguard your future. Schedule your consultation with one of our highly experienced family law attorneys today.
Retirement Savings After Divorce FAQs
Am I entitled to part of my spouse’s retirement savings in a New Jersey divorce?
The portion of a spouse’s retirement savings or pension benefits earned during the marriage is generally subject to equitable distribution in New Jersey. This does not necessarily mean the account will be divided equally. The final division depends on factors including when the benefits were earned, the type of plan and the terms of the divorce settlement or court order.
What is a QDRO and why might I need one?
A Qualified Domestic Relations Order, or QDRO, is a court order used to divide certain employer-sponsored retirement plans, including many 401(k), 403(b) and pension plans. It instructs the plan administrator how much of the account or benefit should be assigned to the former spouse. The divorce agreement alone may not be sufficient to complete the division.
What is the difference between a traditional IRA and a Roth IRA?
A traditional IRA may allow eligible contributions to be tax-deductible, while withdrawals are generally taxable in retirement. Roth IRA contributions are made with after-tax money, but qualified withdrawals are tax-free. Unlike a 401(k), an IRA is generally opened independently through a bank, brokerage firm or other financial institution rather than through an employer.
Can I receive Social Security benefits based on my former spouse’s work record?
You may qualify for divorced-spouse Social Security benefits if your marriage lasted at least 10 years and other federal eligibility requirements are met. Social Security is not divided as marital property, and receiving a benefit based on your former spouse’s record does not reduce the amount paid to your former spouse or their current spouse.
How can I rebuild my retirement savings after divorce?
You can begin by contributing to an employer-sponsored retirement plan or opening an IRA in your own name. If your employer offers matching contributions, try to contribute enough to receive the full match. Consistent contributions, catch-up contributions when eligible and long-term investment growth can help you rebuild financial security over time.
Should I withdraw retirement money received in my divorce?
Cashing out retirement funds may result in income taxes and could reduce the money available for your future. Depending on the type of account and how the transfer is structured, you may be able to move the funds directly into an IRA or another eligible retirement plan while preserving their tax-advantaged status. Consult with legal and tax professionals before transferring or withdrawing retirement assets.
