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How can divorce impact retirement savings?

On Behalf of | Jan 9, 2023 | Divorce

Filing for divorce will mean big financial changes for your household, not the least of which will involve changing where you live or sharing your home equity with your spouse. Your most valuable resources may all end up subject to division in your divorce proceedings, including your retirement savings.

Maybe you have an employment-related 401(k) that you have contributed to with every paycheck and that your employer adds to every year as an end-of-year bonus. Perhaps you have saved on your own and have a Roth IRA retirement savings accounts where you have deposited as much as you can for maximum tax benefit annually.

What will happen to your retirement savings in your upcoming divorce?

You and your spouse will likely share your savings

Sometimes mistakenly assume that their retirement account will be their separate property because their name is the only name on the account. However, for the purposes of property division during divorce, what matters to the Florida family courts is actually when you contributed to the account, not the name of the account holder.

If you used marital income to contribute to the retirement account, then at least part of your retirement account will be subject to division in your divorce. You and your spouse could negotiate your own settlement, or you may ask a judge to divide your property and debts because you can’t reach your own agreement.

In either case, you can typically avoid taxes and penalties further reducing what you have in retirement savings if one of your lawyers drafts a qualified domestic relations order (QDRO). When properly executed by the plan administrator managing someone’s retirement benefits, a QDRO can eliminate the early withdrawal charges and taxes that would otherwise diminish your savings.

You may worry about the practical consequences of splitting your retirement savings, but many people are able to rebuild what they share with their spouse with careful budgeting or updated retirement plans, possibly including working for an extra year or two before retirement.

Learning more about what you can expect in your Florida divorce proceedings can facilitate easier negotiations or help you present a more effective case to the judge presiding over your divorce.