Well-compensated professionals often divert a portion of their income to specialized retirement savings accounts. 401(k)s may offer certain tax benefits and could make professionals eligible for employer-matching contributions. Roth IRAs can also help people ensure their comfort during their golden years by setting aside funds during their peak earning years.
Those who have fastidiously saved for retirement typically expect to retain their retirement savings regardless of what else happens in life. After all, premature withdrawals could result in taxes and penalties. Unfortunately, when those with robust retirement savings divorce, the resources they set aside could be at risk.
What generally happens to specialized retirement savings accounts during divorce?
Contributions may be marital property
Marital agreements have become more common in recent years. If spouses signed a prenuptial or postnuptial agreement designating retirement savings as separate property, then they may have protection throughout the upcoming divorce proceedings.
However, without a formal agreement, contributions made during marriage are typically subject to division in a divorce. Even though only one spouse made deposits into the account and has their name on the account, both spouses have an interest in the balance accrued during the marriage.
Thankfully, there are ways to effectively split retirement savings accounts without penalties and tax consequences. An attorney can draft a qualified domestic relations order (QDRO) after the courts finalize a property division order. Provided that spouses follow the right procedures, a QDRO allows them to divide a 401(k) without penalties and tax consequences.
Roth IRAs generally do not require that extra step. A court order authorizing the division of the account as part of the property division settlement can be adequate to prevent penalties and tax consequences.
Those who do not want to divide their accounts usually have the option of cooperating with their spouses to negotiate a settlement. Those who agree to fairly offset the value of retirement savings accounts might be able to retain the entirety of a Roth IRA or 401(k) in return for giving up their interest in other marital property.
Establishing retirement savings as priorities early in the divorce process can help spouses preserve the resources that matter the most to them. With the right support and approach to property division, people can split even tax-deferred retirement savings accounts without penalties.