Married couples often look forward to retirement with excitement. They may plan to travel together or spend more time with their grandchildren. They may want to prioritize shared hobbies or reinvest in their friendships.
Married people can often enjoy more comfortable retirements than single people. They combine their resources to save more aggressively. They also share living expenses, which can help keep total costs a bit lower. The savings that they have set aside during the marriage could add up to hundreds of thousands of dollars.
Who keeps retirement savings if the couple divorces?
Couples usually share their savings
Sometimes, married couples have negotiated prenuptial or postnuptial agreements that address their retirement savings. If they already have a contract in place discussing the division of their assets when they divorce, then the terms established in that contract determine what happens during the property division process.
Without an agreement, couples typically have to address their most valuable assets by negotiating a settlement with one another or presenting information to the courts during litigation. Even though retirement accounts are often held in the name of just one spouse, they are typically part of the marital estate.
People use marital income to fund their retirement accounts, which means that their savings are subject to division if they divorce. The person whose name is on the account does not simply keep the retirement savings. Instead, they have to calculate how much of the balance is separate property and how much is marital property.
If they have a 401(k) or similar account that offers tax benefits, they may need to draft a qualified domestic relations order (QDRO). After the courts issue the final property division decree, one of the attorneys drafts a QDRO. After the spouses sign the document, they submit it to divide the retirement savings into two separate accounts. The proper use of a QDRO allows for the division of a retirement account without the 10% penalty or tax consequences associated with early withdrawals.
It is not always necessary to divide retirement accounts during divorce. Couples can use their value to balance out other decisions related to marital assets and debts. Judges have the authority to do the same in litigated property division cases.
Understanding what happens to valuable resources during the property division process can help people as they prepare for an upcoming divorce. Property division negotiations may be simpler when both spouses have reasonable expectations.