When workers typically stayed with the same company for the majority of their adult lives, employer-sponsored pensions were the gold standard for retirement benefits. However, as it became more common for workers to transfer from business to business throughout their careers, the portability of retirement savings and benefits became a major consideration.
Many successful adults now use 401Ks or similar retirement savings accounts that offer tax benefits. Addressing those accounts in a divorce can seem dangerous. After all, there are penalties that apply to early withdrawals before you reach retirement age, so you probably believe that you can’t make a withdrawal from the account without incurring substantial financial penalties.
Is it possible for you to share retirement assets in a divorce without diminishing them?
There is a special process for dividing retirement benefits without a penalty
Typically, a least some of your retirement benefits will be part of the marital estate. Unless you have a pre-existing contract with your spouse saying otherwise, what you contribute to your retirement account during the marriage is marital property you will have to divide.
It is common for retirement accounts to only be in the name of one spouse. If a couple agrees to divide their retirement accounts or if the courts order the division of those funds, the couple may have to actually split an account into two separate accounts.
Whether there is a settlement in place or a property division order issued by the judge, the attorney for one of the spouses can draft a special document called a Qualified Domestic Relations Order. The courts have to approve and authorize a QDRO, but once they do, it can divide the account without a penalty.
The spouses present the QDRO to the professional who manages the retirement account, and they follow the instructions on the QDRO to divide the retirement savings between both spouses.
Complex property division often requires creative solutions
The more assets you have, the more you may encounter complications in a divorce. Creative solutions and compromises are often necessary to split marital property. When you understand state law and the basic steps that occur in many divorces, you can be your own best advocate in the divorce process.
Learning about how to address your most valuable assets can be an important part of preparing for divorce.