Let's start with the basics. There are so many different types of retirement accounts out there - IRAs, ROTH IRAs, and 401(K)s just to name a few. While those are probably the most common, there are numerous others. For someone who is not dealing with them every day, it can be confusing. More importantly, not all retirement assets are the same nor should they be treated as if they are. Thus, we are dedicating this blog post to one of the less commonly known retirement plans. That is the Thrift Savings Plan, also known as a TSP for short.
What is a Thrift Savings Plan? 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 plan. It is available to civilian Federal 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.
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.
There is a good bit of confusion about who "owns" retirement accounts 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.
When negotiating the division of a TSP account, you can negotiate it in absolute dollars (such as $150,000 is 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.
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.
If you need additional information about your spouse's TSP account, request it in writing. Spouses (and their attorneys) can get the participant's account balance, any loan balance, and quarterly or annual statements. The TSP will not disclose personal information such as address or social security number.
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.
Qualified Domestic Relations Orders (QDROs) are used to divide private retirement accounts that are governed under ERISA. The TSP is not governed under ERISA and has its own set of requirements for court orders to divide the account. The requirements can be found at 5 U.S.C. §§ 8435(c) and 8467, and 5 C.F.R. part 1653, subpart A. The Thrift Savings Plan will honor any court order or court-approved property settlement agreement that meets these requirements. While the TSP will not review drafts of these documents, they do provide sample language. See the link to their publication below for additional information.
One small but important tip: The court order must specifically identify the account as a Thrift Savings Plan. The terms "Thrift Savings" and/or "Thrift Savings Account" are not considered accurate.
For more detailed information about the TSP Plan and divorce, take a look at this publication by the Thrift Savings Plan Investment Board.
There is a lot to consider when dividing assets in a divorce. For example, how important is liquidity to you? What is the after-tax value of each asset? Is the potential for capital growth more or less important than a guaranteed income stream? What are the death benefits associated with an asset?
Each asset has its own pros and cons associated with it. When considering assets, start with your personal financial goals. Once you know what you are trying to accomplish, consider the pros and cons of each asset. All of this is needed to determine the best division for you.
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. However, it's important to think objectively when making these major financial decisions. I encourage you to work with a Certified Divorce Financial Analyst (CDFA). CDFAs have advanced training in all of the financial aspects of divorce. We can help you understand the best possible outcome to meet your needs.