The vital importance of retirement accounts is difficult to overstate. When someone reaches their senior years, life savings help sustain their retirement. Regardless of “golden years planning,” retirement accounts may face division when spouses divorce. Individuals who contribute to retirement savings might worry about those savings being depleted when divorce proceedings end. Hopefully, the divorce settlement leads to an equitable outcome for both spouses.
Actions for retirement savings during divorce proceedings
Retirement savings, such as those in individual retirement accounts or 401(k) savings plans, follow a different division process during divorce than bank or brokerage accounts. An IRA undergoes division through a transfer incident to divorce while a 401(k) divides through a qualified domestic relations order, or QDRO.
A spouse might look at all assets that contribute to their net worth as retirement savings. However, planning to sell a second home and invest the funds as part of retirement planning doesn’t make the property a retirement plan item under the law. The divorce court could order the division of the home and a 50/50 split of the proceeds.
Additional points about retirement savings and divorce
Some rules may provide positive news for divorcing spouses who are unfamiliar with regulations. Tax law differs for retirement accounts and other investment vehicles. Even though the IRA faces a division and distribution ruling, the spouses won’t have to pay taxes or penalties when a divorce order mandates the action on the IRA accounts. A spouse does not withdraw funds, early or otherwise, so taxes and penalties don’t apply.
When preparing for divorce, compiling a complete list of all assets is advisable. It’s also helpful for an individual to review information about the implications of the divorce on their retirement savings.