People preparing for divorce often think about their life after divorce. For example, they may question what the end of their marriage might mean for their financial stability and overall comfort during their golden years.
Frequently, retirement savings are a major concern for those contemplating divorce. Especially if they are getting close to retirement age, they may worry about what will happen to those resources when they divorce. What do people generally need to know about retirement resources during divorce proceedings?
Different accounts have different concerns
There are four main types of private financial support during retirement, and each has unique considerations to factor into a divorce. Some people accrue pension benefits with their employers. They make regular contributions to the pension program during their employment and then receive payments from their employers after they reach a certain age.
Many others have 401(k) plans. They open an account that they use for pre-tax savings. They reduce their taxable income while working and set money aside for retirement. Their employers may match what they deposit.
Others who are self-employed or who regularly change jobs may start individual retirement accounts (IRAs). An IRA is similar to a 401(k) in that it allows for tax-deferred deposits while working. People then pay tax on their withdrawals after they reach retirement age.
Some people establish Roth IRAs. They do not make pre-tax contributions but rather contribute from their taxed income. That way, they don’t have to worry about paying income taxes on what they withdraw from the account after retirement. They also don’t face penalties for early withdrawals.
What happens to retirement funds in divorce?
Typically, retirement savings are part of the marital estate. Any amounts contributed during the marriage are likely subject to division unless there is a marital agreement outlining different terms. Spouses have to factor in the marital portion of the retirement savings account when dividing their financial obligations and assets.
The law requires an equitable or fair overall property division outcome. Spouses can sometimes reach settlements where one spouse keeps the retirement account and the other receives other assets to balance out that arrangement.
If the spouses agree to divide the account or if a judge orders them to during litigated property division proceedings, they can use a qualified domestic relations order (QDRO) for any accounts with tax-deferred contributions. The right paperwork can prevent penalties and tax consequences. In other words, having a lawyer draft a QDRO helps preserve as much of the retirement savings as possible.
People have the option of setting their priorities when they divorce. Preserving retirement resources is a common goal for those preparing for higher-asset divorces. Those who have assistance strategizing before divorce and throughout negotiations or litigation may have an easier time achieving their goals.