Servicemembers have two retirement assets available: military retired pay (a pension) and the Thrift Savings Plan (TSP), the equivalent of a 401k. Divorcing servicemembers and their spouses must be aware of both plans to ensure a fair division. This article will address only the TSP.
Unlike many private 401k plans, TSP does not limit the servicemember’s contributions. Members can contribute as much of their pay, including most special pay, incentives, etc. as they wish. Like a 401k however, contributions are tax-deferred. This means that the contributions are made from pay pre-tax, reducing the taxable income, but are taxed later upon withdrawal from TSP.
Depending on the member’s contributions, and the growth rate, the TSP can be an extremely valuable asset. Spouses can determine the value by obtaining a current statement. Wisconsin divorce courts usually subtract the estimated tax (usually 20-25%) from the gross balance. Like any 401k, the balance is subject to the market.
At divorce, the TSP is usually divided between the spouses. The divorce judgment is not sufficient. A separate document, called a Qualified Domestic Relations Order, is necessary. This document is usually drafted by a financial evaluator, not the lawyers. It must be reviewed very carefully to ensure that it divides the TSP accurately. Dividing the TSP is much easier than dividing the military retired pay (the pension benefit) because there is a clear account balance that is subject to few other restrictions. The balance can either be divided by percentage or dollar amount.
TSP benefits can also be used for child support and for lump sum payments. It is vital to properly calculate the form of payments. If payments are made to the ex-spouse, he/she pays the tax. However, if payments are made for child support, the servicemember pays the tax. If a lump sum payment is made to the ex-spouse (for example, to pay a debt), he/she pays the taxes. However, if the lump sum were made payable to a creditor directly from the TSP, the servicemember pays the tax. This slight difference can thus have a huge effect on the distribution.
Although the valuation and division of TSP is not complicated, it still must be done correctly. Attorney David Kowalski has extensive experience working with military members and former spouses. Please call Kowalski Family Law to address any questions or concerns arising through a military divorce in Wisconsin.