Enjoying a comfortable retirement typically does not happen by accident. People have to plan carefully to set resources aside and control their cost-of-living expenses during their golden years. Married couples often combine their savings and benefits while sharing basic expenses.
If they plan appropriately, they can potentially enjoy a much more comfortable retirement together than either might be able to afford on their own. Frequently, each spouse may have their own retirement account or pension that they fund throughout their working years. Both spouses may feel strongly about preserving as much of their retirement savings as they can if they decide to divorce. Most spouses have to share any retirement savings that they set aside during a marriage if they divorce.
How can spouses preserve as much as possible from their retirement savings when they divorce?
Agreeing to specific settlement terms
Divorce forces couples to split their property. They also often need to tap into their savings to cover divorce costs. The more issues spouses litigate in family court, the more the divorce may cost. Spouses can limit how much of their savings are at risk by working cooperatively to settle their disputes. Spouses who reach amicable property division settlements may spend less to divorce than those who litigate the major disagreements that arise during their divorce proceedings.
In some cases, spouses can reach agreements that allow them to preserve retirement savings instead of splitting them. The combination of control over the outcome and reduced costs can make trying to settle with a spouse a beneficial option for those concerned about their retirement resources.
Drafting a specialized document
Sometimes, the only fair way to address retirement savings is to split the account. If the spouses are not yet old enough to retire, they are at risk of tax consequences and penalties in some cases. Tax-deferred retirement accounts, such as 401(k)s, can carry income tax consequences and substantial penalties in the event of pre-retirement withdrawals.
Spouses who need to divide a retirement account to fulfill the terms of a property division decree can use a special document to avoid taxes and penalties. An attorney can draft a qualified domestic relations order (QDRO) that details the terms of the property settlement.
When signed by both spouses and approved by the courts, a QDRO allows for the penalty-free division of a tax-deferred retirement savings account. While spouses may lose some of their savings due to the property division process, they can minimize those losses by avoiding income taxes and the 10% penalty imposed on early withdrawals.
Learning how to address high-value resources can help people obtain appropriate divorce outcomes. Retirement accounts often require careful consideration during divorce negotiations or while preparing for litigation.