Many people contemplating divorce worry about their finances. While state law requires a fair or equitable distribution of marital property, the uncertainty of what that means can leave people unwilling to file for divorce.
They may worry about suffering major financial setbacks related to their high-value assets. Some couples have to sell their homes to divide their home equity. Other times, a family business might be the asset that someone worries about losing. Many people focus on their retirement savings. Retirement resources help people ensure they can maintain a reasonable standard of living when they cease working full-time.
What may happen to retirement resources, like 401(k)s, when people divorce?
Savings may be subject to division
Some people mistakenly believe that their retirement savings are their separate property. The account may be only in their name, leading them to think that they can retain the entirety of the account when they divorce. However, the rules for property division focus less on who opened an account and more on the resources they used to fund the account. Any contributions to a 401(k) or similar account during a marriage are likely subject to division when people divorce.
Spouses may need to go over financial records carefully to establish how much of an account is vulnerable to division when they divorce. Any amount of marital income contributed to the account could be subject to division.
Thankfully, spouses can potentially avoid taxes and penalties related to an early withdrawal. If the spouses have an attorney draft a qualified domestic relations order (QDRO) after the courts approve the final property division order, they can divide the balance of the account into two separate accounts without worrying about penalties and taxes.
Actually dividing the account is not necessary to integrate its value into the divorce process. Spouses may be able to reach alternate arrangements involving other assets of comparable value. Home equity can help offset the value of retirement savings in some cases, for example. Many people do have to plan carefully to rebuild retirement resources after they divorce.
Those who understand what property is at risk of division during divorce proceedings can use that information to negotiate for reasonable terms or when preparing for court. Dividing a retirement account may be a necessary step when trying to achieve an equitable distribution of marital property.