People preparing for divorce often focus a lot of their attention on their hopes for life after the split is finalized. They want to look forward to a happier life after they end a frustrating marriage. Unfortunately, divorce often results in major changes to people’s standard of living and their personal holdings.
They have to cover the cost of the divorce, budget to accommodate support obligations and divide their property. The need to split marital resources can have a profound impact on someone’s standard of living and their household budget after the divorce.
Certain assets can have a major impact on an individual’s future financial stability. A retirement savings account, for example, is often a retired individual’s primary source of financial support. How much of a retirement savings account is at risk during a divorce?
Not all savings are subject to division
Some people wrongfully assume that retirement savings are not divisible because the account is often in the name of just one spouse. The name on the account is not actually the deciding factor in property division proceedings. Instead, the family courts look at when people made contributions to the accounts.
Deposits made during the marriage, including deposits made by employers, are potentially subject to division. Any deposits made prior to the marriage or after the couple formally separates are not subject to division.
It is possible to eliminate secondary losses
People sometimes worry about penalties and taxes when they have to divide specialized retirement accounts. A 401(k), for example, offers certain tax benefits during the funding process. Withdrawals ahead of time can lead to tax consequences. The amount withdrawn contributes to someone’s taxable income for the year and can potentially push them into a higher tax bracket.
They also usually need to pay a penalty for any amount withdrawn before they reach retirement age. The penalty is typically 10% of the amount taken out of the account prematurely. Spouses can negotiate arrangements in which they don’t actually divide the retirement account. It is possible to offset its value with other assets.
Other times, spouses might agree to divide the account. They can still prevent tax consequences and penalties if they have an attorney draft a qualified domestic relations order (QDRO). Using a QDRO that reflects the terms of the property division order may allow couples to divide retirement savings without any secondary financial consequences.
People who identify the assets that matter the most to their financial stability and peace of mind can use that information when setting goals for an upcoming divorce. Preserving as much of a retirement account as possible can help people feel more comfortable about rebuilding after they divorce.