Divorce proceedings may drastically alter an individual’s financial circumstances. The expenses that they previously shared with a spouse now become their sole responsibility. Additionally, they have to cover the costs generated by divorce, including court costs and fees for legal representation. They also have to divide their property and their financial obligations with their spouses.
Frequently, people feel anxious about protecting specific resources when they divorce. For many people, retirement savings are on the short list of priority resources to protect during divorce proceedings. Retirement savings help people cover basic cost of living expenses when they no longer work full-time. Losing those savings could be a major financial setback.
How can people protect their retirement resources as they prepare for divorce?
Settling outside of court
The most effective means of preserving specific assets during divorce is to negotiate with a spouse instead of litigating. Someone intent on preserving their retirement savings can achieve that goal by making compromises in other aspects of the property division process. Spouses who amicably settle property division matters do not have to worry about dividing their assets directly when they divorce.
Using the right tools
People don’t just need to worry about how they divide their retirement savings. They also have to consider the possibility of losing some of those savings due to penalties and taxes. Premature withdrawals from tax-deferred retirement savings accounts, such as 401(k)s, can trigger a 10% penalty.
Additionally, the account holder has to claim the amount withdrawn as income and pay taxes on that amount. Having a lawyer draft a qualified domestic relations order (QDRO) can preserve retirement savings by eliminating penalties and tax consequences.
Spouses can divide the account without diminishing the balance unnecessarily or creating tax complications. Each spouse receives a portion of the savings and can use that as a nest egg for rebuilding their retirement resources. In some cases, people can preserve a portion of their retirement savings by reviewing account records. Deposits made prior to marriage or after legal separation may remain the separate property of one spouse.
Retirement accounts are often an important consideration when couples prepare for divorce. Evaluating personal holdings and priorities with a skilled legal team could help people prepare for upcoming divorce proceedings.