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How couples can share retirement funds without penalties during divorce

On Behalf of | Jan 26, 2024 | Property Division

Getting divorced is often a major financial challenge. The process itself costs money, and couples typically need to share their assets with each other. The income that once supported a single household must now cover two sets of bills.

Many people preparing for divorce worry about the financial implications of property division, especially if they are close to retirement age. Those who have set funds aside throughout the marriage for retirement may have to address those savings in a divorce.

Contributions to retirement accounts made during marriage are often subject to division during divorce proceedings. Spouses may need to share what they accumulated during the marriage. However, if spouses handle the process properly, they can avoid financial penalties.

The right documents make all the difference

The decision to take money out of a tax-deferred retirement account before reaching retirement age can be a costly one. The penalties and taxes triggered by an early withdrawal from a retirement account serve as a deterrent. People should do their best to keep their retirement savings in place regardless of what financial needs they may have earlier in life.

Divorce is one of the rare situations in which taking money out of a retirement account is the only reasonable solution. Therefore, those who properly execute a qualified domestic relations order (QDRO) in accordance with a property division order from the family courts can avoid penalties and taxes.

It is possible to divide one retirement account in the name of a single spouse into two separate accounts without any penalties for doing so. Each spouse can then maintain a separate account that they can rely on years later when they retire. But, it’s important to keep in mind that following the right process is crucial to securing the optimal financial outcome in this regard.