Professionals often fund 401(k) accounts, especially if their employers offer matching contributions. People often spend years setting funds aside for retirement. Those funds are an important supplement to Social Security retirement benefits and other resources that help people live without regular income.
Married professionals may worry about the losses they incur by dividing a 401(k) or similar tax-deferred retirement savings account if they divorce. Even if only one spouse helped fund the account, it can still be marital property that is subject to division during a divorce.
Couples can potentially reach arrangements that factor in the value of a 401(k) without requiring the division of an account. If actually dividing an account is necessary, there is a way to do so without incurring additional penalties.
Early withdrawals are costly
There are rules in place intended to deter people from pulling funds out of a retirement account. Any funds pulled from a 401(k) before retirement age increase the person’s taxable income for the year and can leave them with a balance due when they file their annual return. Additionally, it is standard practice to impose a 10% penalty based on the amount withdrawn.
Divorcing couples can have a lawyer draft a qualified domestic relations order (QDRO) when the final property decision order requires the division of a tax-deferred retirement savings account or a pension. When properly executed, a QDRO facilitates a penalty-free 401(k) split.
People concerned about preserving their retirement resources often need help as they begin property division negotiations. Working with an attorney familiar with the challenges of high-asset divorces can make it easier for people to preserve their most important resources.