Retirement accounts are frequently among the most valuable marital assets spouses own. They may have spent many years during the marriage contributing to a 401(k) or similar retirement savings account. In some cases, spouses may have even set aside more for their security during retirement than they have invested in their marital homes.
It is only natural for people to worry about how they handle high-value resources during divorce proceedings. There are three particularly common concerns that people frequently express as they begin preparing for a divorce in which the division of retirement accounts may be a necessary process.
Determining how much is at risk
Frequently, people may have established a retirement savings account before they got married. In such situations, only part of the accounts balance is potentially at risk of division. It may be necessary to go over financial records carefully to establish what is subject to division and what is not. People can sometimes preserve a portion of a retirement account as separate property because they set those resources aside prior to marriage.
Dividing accounts without penalties
Making a withdrawal from a retirement savings account before someone reaches retirement age can be an expensive financial decision. Doing so can push the account holder into a higher tax bracket for the year. They may also have to pay a 10% penalty based on the amount they withdrew from the account.
Some people avoid a penalty by using other assets to balance the value of the retirement account instead of actually splitting the account. Others decide to use a qualified domestic relations order (QDRO) drafted in accordance with the property division decree to limit the losses when splitting the account as part of a divorce.
Rebuilding accounts as soon as possible
In scenarios where property division settlement or court decree requires splitting an account, spouses may worry about how to rebuild their savings. A more aggressive investment strategy is sometimes the best solution possible.
Other times, people may decide to continue working full-time after they reach retirement age or secure part-time employment as a means of limiting their retirement costs and rebuilding their savings. Those who begin the divorce process with an eye on their long-term financial recovery can limit the negative impact the divorce has on their standard of living.
Particularly for those in their 50s and beyond, thinking about retirement savings is a critical element of divorce. Minimizing losses and rebuilding accounts are both smart moves for those thinking about their comfort in their golden years.