People preparing for divorce are often anxious about their finances. Some worry about losing their homes or their home equity. Others focus on their retirement savings. It takes decades to set aside sufficient capital to retire comfortably.
Divorcing couples generally have to divide their retirement savings. If they are not yet at retirement age, they may worry about the possibility of penalties and taxes. Thankfully, there are ways to avoid penalties for early retirement account withdrawals during divorce.
Couples can use a QDRO
When spouses agree that dividing the account is best or a judge orders the division of a retirement account, drafting a special document is often the best option. An attorney can draft a qualified domestic relations order (QDRO) that includes the terms set in the final property division order.
Both spouses sign the document, and the courts must approve it before the spouses submit it to the party managing the retirement account or pension. The proper use of a QDRO eliminates the early withdrawal penalty and the income tax consequences.
Couples can avoid splitting the account
There are a variety of ways for spouses to negotiate a settlement that does not require the direct division of a retirement savings account. They can use other assets or even responsibility for shared debts to balance out the retention of retirement savings accounts in the divorce.
For example, if each spouse has a 401(k) tied to their employment, they might each retain their account. They can then factor in the difference in savings when making decisions about other property division matters. Approaching asset division in a practical manner can help people preserve as much of their resources as possible.
Those preparing for high-asset divorces may need help protecting retirement savings and preserving as much of their resources as possible. Those preparing for high-asset divorces may need help protecting retirement savings and other medical resources, and that’s okay.
