It takes years to properly fund a retirement savings account. Many of the most popular types of retirement accounts offer tax benefits but restrict withdrawals before retirement age. In some marriages, spouses work cooperatively to fund the private retirement account. Other times, both spouses might have retirement savings accounts associated with their employment.
Those accounts can become a source of contention during divorce negotiations. Spouses have to work out an arrangement for property division that appropriately addresses splitting their accounts. If they cannot agree on how to handle the accounts, then they may need to take the matter to family court.
What are some of the most reasonable solutions for people who need to divide retirement accounts when they divorce?
Offsetting the value of the account
Spouses generally need to divide any assets accumulated during a marriage when they divorce. Retirement savings accounts and pensions could be in the name of one spouse. However, any balance accrued or deposits made during the marriage are likely part of the marital estate.
Addressing retirement accounts often begins by calculating the value of the marital portion of the account. Once spouses agree on that figure, they can then use the value of the account to balance out other decisions related to marital properties and debts.
Each spouse might retain their own accounts. One spouse who funded an account could keep their savings in exchange for the other spouse retaining ownership of other valuable marital property.
Splitting the account
Spouses may not have other assets of comparable value to offset the marital portion of a retirement savings account. In some cases, spouses may agree that the best solution is to directly divide all major assets.
In such scenarios, the spouses may need to have one of their lawyers draft a qualified domestic relations order (QDRO). A QDRO can allow spouses to divide retirement accounts without any penalties or income tax complications.
Frequently, early withdrawals lead to a 10% penalty. People also have to report the withdrawn amount as income, which could affect their annual income tax obligations. The appropriate use of a QDRO allows one spouse to receive a portion of the account without risking any secondary financial penalties.
Judges hearing litigated property division cases have the option of imposing whichever solution they believe is most appropriate given the couples’ resources. Spouses may need to establish priorities early to negotiate more effectively or prepare for property division litigation.