Individuals preparing to file for divorce in Arizona or who were served by their spouses are often quite anxious about the future. Many people don’t know what to expect during the property division process. Plenty of misinformation circulates about community property rules and what people can expect during a divorce.
Resources that have taken time to acquire and that have a bearing on future financial stability are often a priority for those preparing for divorce. Retirement savings ranging from employer-sponsored pensions to 401(k) plans can be a source of financial support during retirement. They are also often the biggest asset the couple has accumulated other than equity in their home.
What typically happens with retirement savings when couples divorce?
Accounts are often subject to division
Occasionally, spouses do not need to divide their retirement savings. They may have already signed a prenuptial or postnuptial agreement designating retirement benefits as separate property. Spouses can also reach an agreement outside of court where each spouse keeps their own retirement savings, even if the balances are not equal.
Barring an agreement, spouses can generally expect to share whatever retirement benefits they accumulated during the marriage. Especially in scenarios where one spouse had already begun saving for retirement before getting married, they likely need to conduct a thorough review of the account to determine how much of it is marital property and how much they can exclude from the property division process.
Although community property statutes may apply to the account, that doesn’t automatically mean that the spouses have to divide it in half. It may be possible to use other property and debts to balance out the distribution of assets based on the marital portion of the retirement account.
Dividing retirement does not have to result in tax consequences
Some spouses resist agreeing to divide their retirement accounts because they worry about the penalties that would be assessed or the taxes that would be withheld if they were to withdraw funds to give to the other spouse. Fortunately, there is a process that allows spouses to divide the accounts without incurring tax consequences for the transaction. An attorney can draft a qualified domestic relations order (QDRO) reflecting the terms of the retirement division as part of their final divorce decree.
After the judge approves and signs the QDRO, the spouses can submit it to the professionals managing the retirement account and the appropriate distribution will be arranged, usually as a rollover from one spouse’s account to the other. The proper use of a QDRO can help spouses avoid the penalty associated with early withdrawals from tax-deferred retirement accounts. They can also avoid the income tax consequences that often follow premature distributions.
The more property people accumulate during their marriage, the more help they may need when they prepare for dividing that property. Retirement accounts are among the valuable assets that people need to carefully address as they navigate the divorce process.
