Married couples typically develop their retirement plans based on two people saving for and sharing their expenses during their golden years. However, not all marriages last until one spouse dies.
It is relatively common for couples to divorce. Their retirement savings may have reached six figures by the time people file for divorce. Are retirement savings at risk when couples divorce?
Marital contributions are subject to division
Spouses can jointly own and fund certain types of retirement savings accounts. Other accounts, such as employment-related 401(k)s, are usually in the name of one spouse. Regardless of whose name is on the account, both spouses may have an interest in deposits made during the marriage.
Retirement savings accounts may potentially be partially marital property and partially separate property. Other times, they may be entirely marital property. Spouses may be able to negotiate settlements that allow one spouse to retain their entire retirement savings account. However, they generally need to account for the value of those savings when addressing other marital property.
If dividing the account is the solution that the spouses settle on or that a judge orders, it is possible to split an account without losing additional funds. Early withdrawals from tax-deferred retirement savings accounts can lead to income tax consequences and a 10% penalty.
If the spouses have an attorney draft a qualified domestic relations order (QDRO) and follow the appropriate procedures, they can divide the account without any secondary financial consequences. A QDRO allows the professional managing the retirement account to remove a percentage of the total balance and deposit those funds into a new account in the name of the other spouse.
In some cases, spouses may have negotiated a prenuptial or postnuptial agreement designating retirement savings as separate property. Unless they have a prior agreement that specifically protects the retirement savings they accumulate during the marriage, splitting the account or at least factoring its value into major decisions may be necessary during property division proceedings.
Establishing specific priorities early in the divorce process may make it easier for people to protect their financial resources. Spouses with retirement savings can potentially preserve them despite divorcing, or may at least be able to avoid losses related to penalties and income taxes.
