HOW DIVORCE AFFECTS YOUR RETIREMENT SAVINGS: WHAT YOU NEED TO KNOW
Divorce can have a significant impact on your financial future, including your retirement savings. In British Columbia, retirement accounts are often considered family property and are subject to division. Here’s what you need to know to protect your retirement during a divorce.
1. Understanding Retirement Accounts and Family Property
Under BC’s Family Law Act, retirement savings accumulated during the marriage are considered family property and are typically divided equally. This includes:
• RRSPs (Registered Retirement Savings Plans)
• Pensions (both private and public)
• TFSAs (Tax-Free Savings Accounts) if used for retirement savings
• Employer-sponsored retirement plans
However, contributions made before the marriage may be excluded from division, but the growth on those contributions during the marriage is usually divisible.
2. How Retirement Accounts Are Divided
Retirement savings are divided in two main ways:
• Equalization Payments: One spouse keeps the account while compensating the other with an equivalent amount in cash or other assets.
• Direct Splits: In some cases, the retirement account itself is divided, with funds transferred to a separate account for the other spouse (e.g., via a tax-deferred transfer for RRSPs).
3. Division of Pensions
• Private Pensions: If one spouse has a workplace pension, its value must be assessed. This is done through a pension administrator or an actuary who calculates its worth.
• CPP (Canada Pension Plan): CPP credits earned during the marriage can be split between spouses. This helps ensure both parties receive equitable retirement benefits.
4. Tax Implications
• Transferring funds from one RRSP to another as part of a divorce settlement is typically tax-deferred if done properly.
• Withdrawals from retirement accounts may trigger taxes, so ensure transfers comply with the Income Tax Act to avoid penalties.
• Consult a tax professional to understand the impact on your post-divorce finances.
5. Protecting Your Retirement Savings
• Understand What’s Excluded: Contributions made before the marriage are typically excluded. Gather account statements from the date of marriage to prove pre-marital savings.
• Seek Professional Valuation: Get a financial professional or actuary to value pensions accurately. This is especially important for defined benefit plans, which can be complex.
• Negotiate Strategically: In some cases, you may trade off other assets (e.g., the family home) in exchange for keeping your retirement savings intact.
6. Rebuilding After Divorce
After divorce, you may need to adjust your retirement plans. Consider the following:
• Increase Contributions: Maximize RRSP and TFSA contributions to rebuild your savings.
• Review Your Investments: Adjust your investment strategy to match your new timeline and goals.
• Delay Retirement: Depending on your financial situation, you may need to work longer to rebuild your savings.
• Update Beneficiaries: Ensure your retirement accounts and pension plans reflect your new marital status.
7. Get Professional Help
Navigating the division of retirement assets can be complex. Work with:
• Family Lawyer: To ensure your legal rights are protected.
• Financial Planner: To create a post-divorce retirement strategy.
• Tax Professional: To minimize taxes on transfers and withdrawals.
Divorce may feel like a setback, but with careful planning and professional guidance, you can safeguard your retirement savings and set yourself up for financial stability in the future.