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How people can better protect their retirement savings during divorce

On Behalf of | Oct 13, 2023 | Property Division

Married couples in California generally share their resources and financial obligations. The community property rules in California give both spouses an interest in the income of the other and virtually any assets that they accumulate during the marriage. The longer people remain married, the greater the likely value of their shared marital assets.

Many people aspire to have a seven-figure retirement savings account by the time they cease working full-time. People may, therefore, fight very intensely over their retirement savings during a California divorce. How can people protect the funds they have accumulated for their comfort during their retirement years during a divorce?

Negotiating a settlement

The easiest way for an individual to preserve specific assets during a divorce is to reach an agreement with their spouse. If one spouse feels very strongly about keeping their entire retirement account, they may agree to let their spouse keep certain other assets that are worth a similar amount of money. The only way for people to know for certain what terms will apply to property division is to set those terms themselves in an uncontested divorce. Someone aiming to keep a significant financial asset, like retirement savings, will need to prepare for the likelihood of making concessions in other aspects of the divorce.

Splitting accounts with a QDRO

Unless people have already reached retirement age or are almost 60 years old, they will likely face major penalties for pulling money out of a 401k or similar retirement account with tax benefits. Those penalties can significantly reduce what someone has in their accounts, making it important to avoid penalties whenever possible. When the courts order the division of retirement resources, one of the lawyers representing the spouses can draft a qualified domestic relations order (QDRO).

After court approval, that document can go to the plan administrator to divide the retirement savings. When properly executed, a QDRO allows people to split retirement accounts into two separate accounts without any early withdrawal penalties or taxes. Even though they will lose part of the balance to their spouse, they can still preserve as much of the account as possible.

Identifying the assets that are the most important to someone during or after a divorce and having a workable plan to protect them can make people feel more confident about moving forward with divorce proceedings. Seeking legal guidance is a good way to get started.