As people get ready for divorce, they tend to take stock of their finances. Preserving certain assets can play an integral role in an individual’s post-divorce life plan. Frequently, people on the edge of divorce worry about maintaining their standard of living afterward. Particularly if they are close to retirement age, they may want to preserve their retirement savings if at all possible.
How can people protect the contents of a 401(k) as they prepare for divorce?
With the right paperwork
Frequently, the contents of a 401(k) are at least partially marital property. Any contributions made during the marriage could influence the overall distribution of marital property.
Withdrawing funds from the account before reaching retirement age could lead to a 10% penalty and income tax consequences. Thankfully, people can avoid those penalties by having a lawyer draft a qualified domestic relations order (QDRO) in accordance with the final property division decree.
With a carefully-negotiated settlement
Spouses don’t necessarily need to divide every asset they share. Splitting a 401(k) can be an efficient solution, but it certainly isn’t the only option available. Spouses can agree to use the marital value of the account to offset other decisions that they make about the property division process.
One spouse could keep the account, while the other might request different assets to compensate them for their portion of its value. Particularly in scenarios where spouses settle their property division matters, it may be possible to avoid splitting the account, which effectively eliminates the risk of penalties and tax consequences.
Prioritizing specific assets and outcomes can help people more effectively negotiate high-asset divorces. Spouses hoping to preserve their retirement savings may need to strategize carefully as they begin negotiating property division matters.