Divorce is often a time of financial uncertainty. People know they have to divide their resources with their spouses and may worry about suffering major financial setbacks. Individuals generally must negotiate a property division settlement with their spouses or prepare to litigate in the Massachusetts family courts.
Higher-value assets are usually the priority during divorce negotiations and litigation in Massachusetts. Business holdings, investment accounts and real property are often top priorities. Many people also focus on preserving retirement savings. How much of a retirement account is at risk during a divorce?
People may need to divide their savings
As a general rule, contributions to retirement accounts made during a marriage are subject to division if the couple divorces. People can therefore expect to divide the account, although the exact amount they may have to share with their spouse depends on other property division decisions made during their divorce proceedings. Some people can preserve their retirement savings by negotiating with their spouses to keep the account in exchange for other valuable assets. Others may need to withdraw some funds from a retirement account.
How bad will the penalties be?
If the terms people set or the court property division settlement requires the actual division of the retirement account, people often worry that they will lose a significant portion of the account to penalties and taxes. The early withdrawal penalty for a 401(k) or Roth IRA usually adds up to 10% of the amount withdrawn before retirement age.
People can avoid that penalty by drafting and properly executing a qualified domestic relations order. Those who divide retirement accounts as part of a divorce with a court-approved QDRO do not need to worry about the penalties typically assessed for early withdrawals or taxes. They can simply split a portion of the account’s balance into a newly-created second account and then preserve those resources until they reach the age when distributions will no longer trigger a penalty.
Those who recognize that preserving retirement savings is a top concern for their divorce may have an easier time protecting as much of their resources as possible for later in life when they will live on a fixed income. Learning about the rules that apply during Massachusetts divorces, and seeking legal guidance accordingly, may help people negotiate more effectively.