Annuities and Divorce

Dividing annuity ownership during a divorce can be complex. Dividing annuity ownership during a divorce isn’t just about asset division; it’s about understanding the tax implications that come with it. If you and your ex-spouse co-own an annuity, it’s important to understand the various options and considerations involved in the division. Take a look into the process, from understanding marital property implications to the details of making the transfer.

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  • Written By Jennifer Schell, CAS®
    Jennifer Schell, CAS®

    Jennifer Schell, CAS®

    Financial Writer, Certified Annuity Specialist®

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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  • Edited By Savannah Pittle
    Savannah Pittle
    Headshot of Savannah Pittle, senior editor for

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Reviewed By Brandon Renfro, Ph.D., CFP®, RICP®, EA
    Brandon Renfro, Ph.D., CFP®, RICP®, EA
    Brandon Renfro, Ph.D., CFP®, RICP®, EA, expert contributor

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Co-Owner of Belonging Wealth Management

    As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

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  • Updated: October 30, 2023
  • 6 min read time
  • This page features 7 Cited Research Articles

Key Takeaways

  • Divorce might require splitting an existing annuity. There are several ways this can be achieved with the help of a tax professional or attorney.
  • Couples going through divorce have the option to start a new annuity contract, withdraw the current annuity or transfer its ownership.
  • If the annuity is not considered marital property, it may be unaffected by divorce.

How Annuities Are Treated During Divorce

With an estimated 35% to 50% of marriages in the U.S. ending in divorce, thousands of couples must go through the tedious process of dividing their assets, including retirement funds and houses, each year. Annuities are no exception.

Splitting up an annuity can involve complicated financial calculations. Divorce attorneys recognize the difficulty of this division process, specifically because annuities present a unique challenge due to their tax implications and the nuances of altering contracts.

Different divorce scenarios can also influence the annuity division process. Collaborative or uncontested divorces might allow for a smoother asset division process. However, in arbitration or contested divorces, third parties may step in to decide on the asset splits.

The way you split an annuity in a divorce could impact your tax bill, and affect the benefits you might receive. Consult tax and legal professionals to ensure you handle it properly.

Is Your Annuity Marital Property?

First, you’ll have to determine whether the annuity falls under marital property to know if it can be divided. If deemed marital property, the annuity’s division must still align with state laws and the specific rules set by insurers. 

A court may exempt an annuity from division if it was purchased prior to the marriage and if no one made premium payments post-marriage. When annuities remain with their original owner, splitting them is unnecessary. 

If both parties paid annuity premiums while married, the annuity is typically considered marital property and may be split. Some annuities are owned jointly between spouses, while others are individually owned. You can transfer an individually-owned annuity in part or in whole. However, transferring a large portion of annuity assets can be considered an excess withdrawal and may reduce the amount of death benefits.

Did You Know?

A couple may be able to change some or all of the annuity’s contract terms during a divorce. The issuing company dictates what can be changed and usually requires notification from both spouses or papers from the divorce decree. Some contracts have more restrictive language than others about what can be changed or divided.

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Dividing the Annuity: Tips for Success

Dividing or transferring annuity ownership during a divorce can be a very complex process. It’s wise to consult a financial advisor early in the process to avoid problems that commonly arise when dealing with annuities during a divorce. 

Understanding the annuity carrier’s stance on contract divisions before choosing how you’ll split the annuity is very important. Ask the company to put the information in writing before you have a court order so that you can use it to seek any necessary changes in the order before it is final.

There are several options for dividing an annuity. You can withdraw all or part of it; you can have it transferred into an IRA; or you can withdraw from the original contract and have new contracts issued to you and your ex-spouse.

There are generally four distinct ways that a divorcing couple may choose to divide their annuity:

Starting New Contracts
One of the most common ways to divide an annuity is to withdraw from an existing contract and create two new contracts, one for each party, with new benefits and contract values.
Either party can opt to withdraw a portion or all of an annuity and directly distribute it to both parties. Keep in mind, however, that a large withdrawal from an annuity may reduce benefits including death benefits.
Transferring the Funds
Divorced couples can have awarded amounts transferred directly to them through an IRA account.
Changing Ownership
Transferring ownership does not split an annuity between two parties. Instead, it grants all rights and control of an existing annuity to one party in order for a new annuity contract to take effect.

The first option is generally preferred by insurance companies because it’s easier for them to process. Regardless, your financial advisor will determine the best way to proceed based on the type of annuity involved and ensure compliance with any legal regulations along the way.

More Implications for Transferring or Splitting an Annuity:

  • Transferring or splitting an annuity may initiate a new surrender period, meaning the timetable for higher interest on withdrawals is reset as defined by the insurance company.
  • Individual annuity contracts put limits on exactly which benefits transfer in the case of a divorce. For example, most contracts do not allow transfers of living benefits or added riders.

Surrendering or Selling Payments

In the context of a divorce, surrendering or selling the annuity payments for cash instead of dividing ownership can be particularly appealing when both parties seek a clean break without ongoing financial ties.

Annuity owners can surrender their policy through the issuing company. However, be aware that you may owe high surrender fees depending on factors including how long the policy has been in place, whether distributions have started and how many payments have already been disbursed. 

Selling annuity payments can also trigger tax consequences, depending on the annuity’s growth. Weigh the long-term financial implications against the immediate benefits.

Gain the Flexibility You Deserve

Selling your future payments can better prepare you for whatever financial situation comes up in your life.

Tax Consequences of Annuity Ownership Changes

A divorcing couple with a jointly owned annuity may be required to split their investments, along with all remaining assets, property tax basis and funds. Maintaining a joint annuity contract can bring on negative tax consequences for both parties. Often, one spouse transfers the annuity, in whole or part, to the other spouse, granting full ownership of the contract. This transfer includes all tax implications.

The IRS allows certain exemptions for owner transfers related to divorce. Done correctly, the transfer should not be subject to tax consequences and contract fees. Couples transferring ownership of the annuity from one spouse to another don’t face added tax liability for the transfer. In other words, the IRS treats divorce as a non-taxable event. The annuity maintains its tax-deferred status, though the new annuity owner will still owe income taxes on distributions. 

When transferred incorrectly, any transferred assets can immediately be taxed as ordinary income and may trigger additional tax penalties and surrender charges.

If one spouse accepts an early distribution from an annuity as part of a divorce settlement, the IRS will charge income taxes on earnings in addition to an early withdrawal penalty. If the policy owner moves the asset to a new annuity under a process known as a 1035 exchange, they will not owe added taxes.

How Qualified Annuities Are Impacted

Annuities held within qualified retirement plans, such as 401(k)s or IRAs, come with specific tax implications. To maintain tax exemptions during a division, couples need a Qualified Domestic Relations Order (QDRO). This court-issued order is needed for dividing retirement assets without incurring tax penalties.

However, if the annuity is nonqualified and taxes have already been paid on the money invested in the account, a QDRO is not required to split the annuity. Only the earnings are taxed upon withdrawal.

After taking the original contract terms into consideration, the court may allow a couple to divide future periodic payments or distribute the annuity in a lump sum. The QDRO needs to be in place prior to the finalized divorce in order to protect both parties.

Insurers must adhere to court orders for annuity splits.

Is An Annuity Right For You?

Our short quiz provides clarity on whether an annuity is a smart choice for your retirement portfolio.

Federal Employee Retirement Benefits

Federal employee retirement benefits, such as the civil service retirement annuity, are governed by the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) and are not subject to the Employee Retirement Income Security Act (ERISA). Because ERISA governs private-sector pensions, QDROs for dividing these assets in a divorce won’t necessarily be accepted for federal employees.

Full details regarding the division of a federal employee’s annuity or pension can be found in Title 5 of the United States Code and Title 5 of the Code of Federal Regulations.

Editor Malori Malone contributed to this article. 

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 30, 2023
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