The assets that people acquire during a marriage can have a direct impact on their financial comfort and stability for the rest of their lives. Retirement savings, for example, help professionals plan for the years when they no longer work in full-time professions and have to live on a fixed income.
People may contribute regularly to a 401(k) or similar retirement savings account to establish a nest egg for later in life. Those savings can be vulnerable in the event of a divorce. Particularly when people divorce after multiple years of marriage and well into a successful career, one of their main goals in the divorce might be to preserve their retirement resources.
What are some of the strategies that can help people retain as much as they can of their retirement savings when they divorce?
Showing some savings are separate property
Occasionally, people start their marriages with prenuptial agreements. They may have already established that certain assets, including individual retirement accounts, are the separate property of each spouse. Others may not have contractual agreements with their spouses, but at least some of their retirement savings might still be separate property. The timing of contributions is generally what determines if retirement savings are separate or marital property. Deposits that people made prior to getting married could remain their separate property when they divorce. However, contributions from during the marriage are often subject to division.
Splitting an account carefully
Most people who have 401(k)s and similar retirement accounts realize that early withdrawals can lead to penalties that significantly diminish the overall value of their savings. They may also have to pay more in income taxes that year. After the courts approve a final property division order, they may be able to divide the account without any penalties or tax complications. People who draft and properly execute a qualified domestic relations order (QDRO) can split retirement accounts without the 10% penalty or any income tax consequences.
Offsetting savings with other resources
For those who want to prioritize retaining their entire retirement savings account, negotiations may be in order. It is often possible to reach an arrangement with a spouse that allows one party to retain the entirety of a retirement savings account in consideration of how they divide marital debts and other valuable assets. One spouse could retain their retirement savings by accepting more marital debt or giving up their interest in other valuable marital property, like vehicles or investments.
People who approach property division proceedings with specific goals in mind can often find effective strategies to help them achieve those goals. Preserving retirement resources can be a smart and achievable goal for many people concerned about their stability in the future.