The more resources spouses acquire during marriage, the more difficult it may be for them to divorce. Couples may find themselves fighting over valuable assets. They may also worry about the long-term economic implications of a divorce.
People who have saved for retirement may worry about losing some or all of those savings during a divorce. Why might retirement resources be vulnerable during a divorce?
Early withdrawals carry consequences
For some people, retirement savings represent the biggest individual marital asset. They might need to tap into those funds to cover their expenses during the challenging transitions of divorce.
If they are not yet at retirement age, their savings are at risk. Early withdrawals from tax-deferred retirement savings accounts, such as 401(k)s, can lead to a 10% penalty and income tax obligations. Even if people don’t try to use retirement savings to pay for divorce, they may need to divide them with their spouses.
Contributions made during the marriage are part of the marital estate, even if only one spouse actively contributed to the account. Thankfully, in cases where a property division order requires spouses to split a retirement savings account, they can use it qualified domestic relations order (QDRO).
Those who settle property division matters could negotiate to retain their savings if they take responsibility for more marital debt or give up their interest in other assets. After divorce, people can invest aggressively to recover their losses and rebuild their savings.
Knowing what to expect throughout the property division process can help people protect their most valuable resources. Retirement savings accounts and other valuable assets are vulnerable, but the right strategies can minimize losses.