A Thrift Savings Plan Is Similar to a 401(k)
The Thrift Savings Plan (TSP) is the federal government’s retirement savings plan for members of the uniformed services and many federal civilian employees. Although it is administered by the federal government rather than a private employer, a TSP functions much like a traditional 401(k). It is a defined contribution retirement plan, meaning the participant owns an account with an identifiable balance that changes as contributions are made and investments increase or decrease in value.

Because a TSP has a measurable account balance, it is generally divided differently than a military pension or other defined benefit retirement plan. While military retired pay is a future monthly pension benefit, a TSP is an investment account that contains actual retirement assets.

Only the Community Property Portion May Be Divided
Texas is a community property state. Contributions made to a TSP during the marriage, together with the investment growth attributable to those contributions, are generally presumed to be community property. See Tex. Fam. Code §§ 3.002, 3.003, 3.007, and 7.001.

If the service member or federal employee established the TSP before the marriage, however, the portion accumulated before marriage is generally separate property. Likewise, under appropriate circumstances, the investment growth attributable to that separate property may also remain separate property.

Only the community property portion of the account is generally subject to division by the divorce court.

Tell Your Attorney Immediately If You Had a TSP Before Marriage
If you began contributing to your TSP before you were married, it is important to tell your attorney as soon as possible.

Establishing a separate property claim frequently requires obtaining historical account statements, contribution records, and other financial documents to identify the value of the account on the date of marriage. This process is commonly referred to as tracing.

Because older account records may become more difficult to obtain over time, identifying a separate property claim early in the case allows your attorney to preserve the evidence necessary to distinguish your separate property from the community estate.

A Financial Expert May Be Necessary
Although a TSP is generally easier to divide than a defined benefit pension, determining the community and separate property interests is not always straightforward. When a portion of the account predates the marriage, or when the account has experienced years of contributions, transfers, loans, or investment gains, a tracing analysis may be required.

In many cases, we work with forensic accountants or other qualified financial experts to trace the account and determine the community and separate property interests. An expert analysis can help ensure that both spouses receive the portion of the account to which they are legally entitled.

A Court Order Is Required to Divide a TSP
Although a TSP functions similarly to a 401(k), the account cannot simply be divided because the divorce decree says so.

The Federal Retirement Thrift Investment Board requires a qualifying Retirement Benefits Court Order (RBCO) before it will divide a TSP account. This court order serves a function similar to a Qualified Domestic Relations Order (QDRO) used for many private employer retirement plans, although it is governed by federal statutes and TSP regulations rather than ERISA.

Because TSP orders must satisfy specific federal requirements, careful drafting is essential. A deficiency in the court order can delay the division of the account or require the parties to return to court to correct the order.

Dividing a TSP Generally Does Not Create a Taxable Event
Many people worry that dividing a retirement account during a divorce will immediately result in income taxes. In most cases, that concern is unfounded.

When a TSP is divided pursuant to a properly prepared court order and transferred in accordance with applicable federal law, the transfer itself generally does not create a taxable event. Taxes are generally deferred until retirement funds are later distributed from the account.

However, if either party elects to withdraw retirement funds instead of maintaining them in a qualified retirement account or otherwise preserving their tax-deferred status, income taxes and, in some circumstances, additional tax consequences may apply.

Because tax issues vary from case to case, you should consult a Certified Public Accountant (CPA) or qualified tax professional before making decisions regarding retirement assets.

Experienced Guidance Can Protect Your Retirement
A Thrift Savings Plan often represents years of disciplined retirement savings and may be one of the largest assets accumulated during a marriage. Properly identifying the community property interest, preserving any separate property claim through tracing, preparing the appropriate court order, and coordinating with financial professionals are all critical steps in protecting those assets.

At Fergus & Tomanka, we regularly assist clients with the division of retirement accounts, including Thrift Savings Plans, military retired pay, 401(k)s, IRAs, TRS, ERS, and other retirement benefits. If you are facing a divorce involving retirement assets, we can help identify the issues early, coordinate with qualified financial experts when necessary, and work to ensure that your retirement benefits are divided accurately and in accordance with Texas and federal law.