Saving for retirement during marriage is a smart decision. Couples can combine their resources to help ensure their financial stability when they stop working full-time. Those savings may be at risk, however, during divorce proceedings.
Frequently, the direct division of a 401(k) or similar account is necessary to achieve an equitable property division outcome. Withdrawing funds from a 401(k) or other tax-deferred retirement savings account before reaching retirement age can lead to income tax consequences. There is also a 10% penalty that further reduces the value of the account after the withdrawal.
Spouses who agree to split a retirement account or who are subject to a court order to divide their savings still can benefit from experienced legal guidance to avoid penalties or losses.
The right document makes all the difference
Dividing pensions and tax-deferred retirement savings accounts is common in a divorce. There is a straightforward process that allows the spouses to avoid tax complications and penalties. They must have an attorney draft a qualified domestic relations order (QDRO).
This document includes the specific details outlined in the property division order regarding the retirement account. Both spouses must sign the QDRO. The courts must review and approve it. Finally, the spouses must submit the completed document to the entities managing the retirement accounts.
A QDRO allows for the transfer of a specific percentage of the original account balance in the name of the other spouse. As long as neither spouse withdraws additional funds from their account, there should be no tax issues or financial penalties.
Following the right procedures can limit the collateral consequences of property division. Spouses concerned about their retirement savings should get the necessary support as early as possible to help ensure that they follow the right procedures and minimize their losses.