June 15, 2023

Protecting your financial future is always important in a divorce, but if you are nearing retirement age, you will likely have the added concern about what will happen to your retirement assets. If you’ve planned and worked to have a comfortable retirement, the fear that your divorce can derail all your efforts is unsettling. However, there are ways to make sure your retirement accounts are protected.

How are Retirement Accounts Split During a Divorce?

Generally speaking, retirement accounts are considered joint property, and your state will have its own laws about how marital property will need to be split in a divorce. Community property states will split all joint assets equally – 50/50 – and equitable distribution states will have different methods to determine what each spouse is entitled to. Your retirement accounts will be valued, and the value of the account – rather than the current balance – will be used as the number to split. However, these accounts are divided differently than other accounts because of tax laws, and your spouse would only be eligible for contributions made during your marriage. Your divorce attorney can help you determine how best to handle splitting these accounts.

Liquidating Retirement Accounts Before a Divorce

It may sound like the easiest way to split these assets: liquidate, split the amount, and then each spouse can open their own separate account. For certain accounts, such as checking, savings, or investment accounts, this makes sense. However, for retirement accounts, the smart answer is no. Cashing out retirement accounts early will result in penalties and taxes, and this can hurt the overall value of your accounts. Divorce is not considered a hardship that would allow you to avoid these penalties. Do what you can to keep your retirement accounts intact.

Alternatives to Dividing Your Retirement Accounts

Your divorce attorney, along with a financial advisor, can look at your current retirement accounts and propose a settlement that will allow you to maintain the account while still offering a fair split to your spouse. If you don’t want to break up your retirement accounts, consider offering other assets. For example, you may negotiate that your spouse is able to retain ownership of your family home in exchange for keeping your retirement accounts intact. Or, if your spouse has their own retirement account and the sizes are comparable, you can agree to keep your own accounts. Whatever you decide should be done based on the advice of your divorce attorney. You don’t want to agree to something that sounds easy or fair initially, but will end up hurting you in the long run. If you are close to retirement age, trust the professionals to advise you on the best way to stay on track for retirement.

Starting over is never easy, but that doesn’t mean you will lose everything you’ve worked for in your adult life. With the right divorce attorney, you can equally divide your assets in the divorce while still keeping your retirement plans on track. Staying open about your finances, being willing to negotiate, and trusting your divorce attorney can keep your retirement plans solid. If you’re going through a divorce or considering filing for divorce and you’re not sure what your next step should be, contact my office today.