Divorce requires financial separation. Spouses have to go over their resources and financial obligations. They can then negotiate a settlement with one another or litigate if they cannot agree on what is fair.
Retirement accounts can sometimes rival home equity in their overall value. Many couples aim to have a million dollars in retirement savings before they cease working full-time. The closer spouses are to retirement age, the more they may have accumulated in their retirement savings account.
Even if the account is in the name of one spouse, the funds in the account may still be subject to division during a divorce. Any contributions made during the marriage are typically part of the marital estate. How do couples divide retirement accounts when they divorce?
With special documents
Making an early withdrawal from a retirement account can be a costly decision. Professionals with 401(k)s and other tax-deferred savings accounts could face serious tax consequences for early account withdrawals. They may also need to pay a 10% penalty based on the amount that they removed from the account.
Divorce is one of the few scenarios in which it is possible to withdraw funds from retirement accounts without risking tax consequences and penalties. The spouses can have an attorney draft a qualified domestic relations order (QDRO) that complies with the terms set in the property division order.
The professional managing the retirement account can then withdraw a percentage of the account’s balance and place those funds in a new account in the name of the other spouse. When done properly, executing a QDRO can help spouses split a retirement account without financial consequences.
By offsetting its value
Many professionals who have saved for retirement do not want to diminish their resources due to divorce. They may instead negotiate a property division settlement where they retain the retirement account.
To achieve that goal, the account holder typically needs to allow the other spouse to keep property that has a comparable value. They could also take responsibility for more marital debts to even out the financial circumstances of the spouses.
Evaluating marital property can help people develop workable strategies for the asset division process. Spouses who approach divorce negotiations with certain goals in mind can potentially avoid unnecessary conflict about major assets. Retirement accounts require appropriate consideration from those navigating property division matters.