Retirement accounts are important for people’s long-term financial stability. Especially when people divorce and must assume sole responsibility for managing household expenses, they may worry about whether or not they have enough capital set aside for a comfortable retirement.
Spouses frequently need to split their retirement savings accounts when they divorce, as contributions made during the marriage are marital property. Spouses may need to ensure they do not incur income tax liability or financial penalties due to early account withdrawals — particularly in cases involving tax-deferred retirement savings accounts.
Accounts are subject to withdrawal restrictions
Tax-deferred retirement savings accounts allow people to set aside funds while they work to support themselves later when they do not. The rules that apply to retirement savings accounts deter withdrawals that may leave people without adequate savings later in life when they need the support the most.
Early withdrawals from a tax-deferred retirement savings account are considered taxable income. They can push a person into a higher tax bracket and leave them with a bill due at the end of the year. Early withdrawals also usually come with a 10% penalty.
Appropriate documentation can help people completely avoid withdrawal penalties. An attorney can draft a qualified domestic relations order (QDRO) that allows for the division of the account without any financial penalties. Spouses can even agree to property division terms that do not necessitate the split of a retirement savings account but instead allow either spouse to retain the account while the other receives other valuable property from the marital estate.
Having experienced legal guidance can help spouses learn about the process and avoid common mistakes. Attorneys can manage paperwork and guide their clients as they negotiate appropriate property division settlements.