Couples who have accumulated more resources during their marriages often have a more difficult process when they decide to divorce. More assets to divide will mean more financial terms to negotiate and more resources to disclose and value. People may disagree about how to divide their property and may struggle to complete the asset division process without incurring additional losses.
Often, retirement savings are among the most valuable shared property couples have after a lengthy marriage. Retirement savings may add up to seven figures or more when people are close to retirement age. Even if they still have a decade or more to go before retirement, the balance in their account that could be close to the value of their marital home.
Not only do people worry about needing to divide those savings with their spouse when they divorce, but they will also often worry about losing some of those funds to penalties. Will the early withdrawal of funds from a retirement savings account during a divorce trigger penalties that will reduce the total value of the account?
Spouses can often avoid costly penalties
The good news for those preparing for a divorce and expecting to divide their retirement savings is that if they have to actually split the retirement account, they can do so without triggering penalties and taxes that could consume a substantial amount of those savings. One of the lawyers assisting with the divorce can draft a qualified domestic relations order (QDRO) that reflects the terms set by the couple or the judge presiding over their case.
They then submit that documents to the courts for review and approval and will send the approved documents to the company or professional managing the retirement account. Even if it is many years before someone is eligible to retire, they can avoid penalties provided that the division of the account simply serves to transfer some of its balance into a newly formed retirement account in the other spouse’s name with a QDRO.
If either spouse actually liquidates those resources and pulls them out of savings to use, then taxes and penalties may affect how much they receive. Seeking legal guidance and knowing how to divide valuable assets effectively can help people reduce how much they’ll lose in their upcoming divorce.