The outcome of divorce proceedings has a direct impact on the future finances of the spouses involved. Both the cost of the divorce and the need to divide property can have long-reaching economic consequences.
People preparing for divorce often need to think about their long-term healing and financial recovery as they begin planning for the road ahead. For example, spouses need to evaluate their shared property and determine what resources they want to retain and how they intend to rebuild after the end of the marriage.
Retirement accounts are often an important consideration when thinking about the future. What generally happens with retirement savings when couples divorce?
Savings may be subject to division
Some people assume that retirement savings are the separate property of one spouse. Frequently, accounts have a relationship to an individual’s employment. Each spouse may have their own standalone 401(k) or similar retirement savings account. They may make contributions with every paycheck or when they have extra income. Any contributions made during the marriage, including matching deposits made by employers, are typically subject to division when people divorce.
Couples do not always have to divide the account. Instead, they have to quantify how much of the balance is marital property. They can then factor that value into other decisions. If one spouse wants to keep their retirement savings account, they may need to give up their ownership interest in the family home or may need to agree to take responsibility for more marital debt to balance that decision out in a fair manner.
Spouses don’t always have the resources necessary to reach a reasonable property division settlement without actually splitting retirement savings. Thankfully, there is a legal process in place that can help spouses avoid tax consequences and penalties. By having a lawyer draft a qualified domestic relations order (QDRO), houses can divide 401(k)s and similar accounts without worrying about a 10% penalty or income tax consequence.
The best solution for addressing retirement accounts when dividing marital property depends on a variety of factors. Spouses may need to think carefully about their priorities as they prepare for asset division negotiations. Understanding how to handle retirement accounts can give people options in that regard.
