Younger divorcing couples often have to worry about financial penalties related to the early withdrawal of retirement savings. Taxes and penalties can potentially reduce the total balance of a retirement account.
There are two primary tactics that can help people avoid early withdrawal penalties when splitting retirement resources during divorce.
They can avoid splitting the accounts
Retirement accounts are often among the most valuable assets that people divide when they divorce, but that does not mean that people absolutely have to split the account itself. Couples can determine what portion of their retirement savings is marital property by calculating how much they added to the account during the marriage. They can then divide other property to account for one person retaining the retirement savings. Especially when couples negotiate their own property settlement terms, they have the option of using other assets to offset the value of a retirement account so that one spouse can retain the account without sharing it.
They can file special paperwork
When couples recognize that the best way to handle the retirement account is to split by allocating a specific percentage of its value to each spouse, they can agree to those terms in a settlement. They may also receive a property division order from a judge that imposes such terms on their family. In either scenario, one of the spouses can have their lawyer put together a qualified domestic relations order (QDRO) to facilitate the division of the account. After approval by the courts and proper filing with the professionals managing the account, a QDRO will allow for a couple to divide retirement savings without incurring the taxes and penalties truly imposed on those that make withdrawals before they retire.
Either of these approaches can help young couples who are navigating divorce years before retirement to divide their resources without being compelled to devote part of their savings to penalties and taxes. Seeking legal guidance and planning ahead for dividing key assets like retirement accounts can help spouses reduce the financial losses that they suffer as a result of divorce.