Dividing property during a divorce is often a difficult experience. While people understand that they have to share their resources with their spouses, it can be hard to watch the net worth of the household shrink rapidly.
Certain types of assets may be particularly vulnerable during divorce proceedings. If the spouses have set funds aside for retirement in tax-deferred accounts, the division of those accounts could be one of the most important parts of the property division process. Spouses with retirement savings need to ensure that they follow the right process to avoid secondary financial setbacks beyond the amount that they must withdraw to distribute to a spouse.
How can people preserve as much of their retirement resources as possible during divorce?
By using the right paperwork
The terms of a property division settlement depend on either the arrangements that the spouses establish or what a judge views as fair. The final terms outlined in the property division settlement dictate how the spouses should split their resources and their shared financial responsibilities.
If the property division order includes instructions to split the contents of a retirement account, there is a way to do so without incurring additional losses. Pre-retirement withdrawals from 401(k)s and similar accounts typically result in a 10% penalty. People also have to pay a larger amount in taxes, as they must claim the full amount of the withdrawal as income.
Having one of the attorneys assisting with the divorce draft a qualified domestic relations order (QDRO) can eliminate the tax consequences and early withdrawal penalty that could further diminish the value of the retirement savings. After both spouses and a judge approve the QDRO, it is possible to split the savings into two separate accounts.
So long as both spouses allow the funds to remain in their accounts, they can both maximize how much they retain from the account. For some people, the simpler solution might be to use other assets or marital debts as a way of balancing out retirement savings.
Learning about the tools, such as QDROs, available for complex property division matters can be helpful for divorcing spouses. Those with more assets have more to lose if they do not approach the process carefully.