Dividing personal assets in a divorce can be a nerve-wracking experience. People may fear losing assets that they spent years saving to acquire. The loss of certain assets can make people very anxious about their future financial stability.
Retirement savings, for example, are often the only financial protection someone has once they stop working. Without adequate retirement savings, they are at risk of extreme financial hardship or ultimately being unable to leave the workforce as they age. Many people preparing for divorce logically feel protective of their retirement savings.
How much of someone’s retirement savings account might be vulnerable in a divorce?
Some of the balance is likely at risk of division
One of the reasons that retirement savings accounts are so unpredictable is that every family’s financial situation is different. Colorado law requires an equitable distribution of marital assets, possibly including some retirement savings.
What that actually means for the family can be drastically different from one case to the next. As a general rule, people usually need to divide or at least account for contributions to the account that they made during the marriage. Deposits from before the marriage or after a legal separation may have protection from division in the divorce.
Some couples can negotiate terms that allow them to preserve a retirement account by offsetting its value with other assets. Many others may need to actually divide their retirement savings accounts. Account division can make people nervous because assessing taxes and penalties is standard practice.
However, there is a process that people can use when dividing retirement accounts like 401(k) and Roth IRAs to avoid the standard 10% penalty assessed and the tax payments due after an early withdrawal. Spouses who have one of their lawyers draft a qualified domestic relations order (QDRO) can theoretically split the contents of one retirement account into two separate accounts without any penalties or tax concerns.
Those who are closer to retirement age may need to make some adjustments to their plans after divorce. Some people work for a few extra years or plan to work part-time for the first years of their retirement. Others may find ways to reduce their expenses, such as scaling back on travel plans. Understanding what happens with the most valuable assets on the table during a divorce may help people negotiate more effectively and plan for the future accordingly.