Concerns about finances often dominate the early stages of divorce. People are unsure of what might happen with their property and how much divorce might cost. Some people may even delay filing because they fear the economic impact that the end of the marriage could produce.
People tend to focus on several main concerns. They worry about how much financial support they may have to pay or may be eligible to receive. They may also worry about the division of specific assets. Businesses and real estate tend to become top priorities during property division planning.
Retirement accounts can also be a source of concern and conflict. People generally rely on their retirement savings to maintain a comfortable standard of living when they cease working full-time. How much of a household’s retirement savings are at risk in the event of a divorce?
Accounts may be subject to division
Some couples save together for divorce. However, it is much more common for spouses to have retirement accounts associated with their employment. Some even receive contributions from their employers. It is common for people to inaccurately assume that what they saved in their own names remains their separate property when they divorce. That is not typically how the courts handle retirement accounts. Instead, spouses have to divide contributions made during the marriage.
Deposits made prior to marriage may remain the separate property of the account holder, but the contributions made during the marriage are likely subject to division. Depending on the duration of the marriage and when people begin saving for retirement, that might potentially mean that the entire account is among the marital assets that the spouses may have to divide when they divorce.
Spouses can avoid taxes and penalties
The good news for those worrying about the financial implications of dividing their retirement savings when they divorce is that people can typically avoid the 10% penalty and tax consequences associated with early account withdrawals. So long as both spouses continue saving their portion of the account, they can preserve what they each receive from the account.
Drafting and recording a qualified domestic relations order (QDRO) can help. The spouses can share what they have saved for retirement without losing more of the account to early withdrawal penalties and income tax obligations.
Understanding the rules that apply during property division and what assets are subject to division can help those trying to plan for the future. Spouses who approach property division with realistic expectations are less likely to become frustrated during divorce and disappointed afterward.