Married couples share almost everything with one another. They talk about their dreams and grievances. They often share their financial resources. They plan a future together. Part of that planning process may involve establishing retirement plans.
One spouse may be eligible for a pension. The spouses might also use tax-deferred retirement savings accounts to set capital aside for their golden years. Those resources can then become a complicating factor when couples decide to divorce.
Retirement savings accounts represent not just earned income but also future financial stability. People often feel anxious about the idea of dividing retirement accounts or losing access to them when they divorce. Are retirement accounts generally subject to division during divorce proceedings?
Some of the funds may be marital property
There is no universal, black-and-white answer regarding the categorization of retirement savings in a divorce scenario. Typically, spouses have to share what they acquired during marriage. Any income earned while married becomes part of the marital estate.
Some people enter marriage with agreements in place to protect their retirement savings. Prenuptial agreements could designate retirement accounts or pensions as separate property. Spouses might also include terms regarding their savings in a postnuptial agreement. Without a marital contract, contributions made during the marriage are likely subject to equitable distribution laws.
Even if the account is only in the name of one spouse and the other never deposited any money directly into the account, the amount accrued during the marriage is part of the marital estate. Spouses may need to divide the account. They can calculate the marital portion of the account and then use that figure when addressing other assets or marital debts.
In cases where spouses agree to divide an account or a judge orders its division, it is possible to avoid penalties and tax consequences. Spouses can have an attorney draft a qualified domestic relations order (QDRO) and can then avoid the income tax consequences and 10% penalty that typically apply to pre-retirement withdrawals.
Learning more about the rules that govern equitable property distribution can help spouses as they prepare for divorce. Retirement savings are often at least partially subject to division unless there are special circumstances.