Saving for retirement throughout marriage can help spouses feel more confident about the future. Unfortunately, those savings are usually vulnerable during a divorce. Any deposits into 401(k)s or similar tax-deferred retirement savings accounts are potentially subject to division during a divorce.
Spouses may feel concerned about the need to not only divide what they have earned but also the risk of penalties and tax consequences. Those who must split tax-deferred retirement savings accounts can often make strategic moves to avoid the loss of their savings due to taxes and penalties.
Penalty-free 401(k) division is possible
Typically, even major emergencies do not allow people to withdraw funds from a tax-deferred retirement savings account without consequence. Any early withdrawals are likely to lead to a 10% penalty. Paying income taxes on the amount withdrawn is also standard.
It is possible to avoid those financial setbacks when splitting a 401(k) during a divorce. If the final property division decree requires that the spouses split the account, they can have a lawyer draft a qualified domestic relations order (QDRO) that includes the specific terms set in the property division order.
Both spouses have to sign the QDRO, and then the courts must review and approve the QDRO as well. If spouses follow the appropriate procedure, it is possible to split a 401(k) without losing funds to taxes and penalties. Spouses can also potentially negotiate settlements in which they address the value of the 401(k) without necessarily dividing the account.
Discussing personal priorities, such as avoiding penalties and saving as much of a retirement account as possible, with a skilled legal team can help people as they prepare for property division negotiations or litigation. Spouses who have saved diligently for retirement can typically protect those savings if they follow the right processes during divorce.
