Many people retire in their 60s. Married couples often plan jointly to combine their resources during retirement and ensure they enjoy a comfortable standard of living together. Those plans may fall apart when the spouses decide to divorce. People often worry about losing their retirement savings due to divorce.
Are retirement savings at risk at the end of a marriage?
Marital contributions may be divisible
Unless divorcing spouses have a clear marital contract in place, whatever they earn or purchase during marriage becomes marital property. Even if only one spouse contributes to a particular account, both spouses likely have an interest in the account’s value.
They may need to divide their savings or at least consider the balance accrued during the marriage when dividing other properties. If the spouses are still too young to withdraw funds from a tax-deferred retirement savings account without a penalty, they may need to draft special documents to protect their savings when they divorce.
A qualified domestic relations order (QDRO) can help prevent both the income tax consequences of premature withdrawals from the account and the 10% penalty typically imposed on early withdrawals. Spouses may need to make certain concessions regarding property division, such as sharing their retirement savings with one another.
However, they can then adjust their plans accordingly. They can continue working for longer, take extra steps to control their retirement expenses or even work with a financial manager to establish a more aggressive investment strategy to account for the reduction in their savings due to property division.
Learning more about the general rules that apply during property division can help people set and achieve specific goals throughout their divorce proceedings. Seeking legal guidance is a great way to get started.