There is no nice way to say it, but the chances are good that a divorce will impact your retirement savings. 401(k)s and IRAs are not protected assets in a divorce settlement. Any retirement funds that you have accrued throughout the course of your career are subject to equitable distribution. Those who have gone through a divorce are 7% more likely to not have any retirement savings and wealth and earnings are typically lower among divorcees than the general population.
Money problems are different for every couple and different types of divorce will require a different level of financial commitment. A drawn-out litigated divorce will cost a lot in attorney and court fees. Mediation, on the other hand, allows a divorcing coupe a more cost-effective means of coming to a divorce agreement. Mediation is not appropriate for every divorce, though, and high-asset divorces can get financially messy very quickly.
The question then becomes: How can I protect my retirement savings in divorce? We have some potential answers to that question.
What Assets are Subject to Division in a Divorce?
Any assets accrued during your marriage is a part of the marital estate. The marital estate is what is divided during a divorce. Indiana follows the rule of equitable distribution. The court will decide what it takes to ensure that both spouses are on their feet post-divorce. That means you could end up relinquishing more than 50% of your marital estate. This includes retirement funds. The only way around this is with a prenuptial agreement.
What Happens to IRAs and 401(k)s in Divorce?
Any funds contributed during the marriage are part of the marital estate and subject to equitable distribution. Divorce is one of the only times that an individual can access the funds of an IRA or 401(k) without the fear of penalty.
Divesting a percentage of an IRA or 401(k) is tricky because federal and state laws apply. Further, investment accounts may be tied to the stock market making their value variable over time. These accounts can only be divided with the aid of a Qualified Domestic Relations Order (QDRO). The QDRO directs the retirement plan administrator on how to divest a percentage of the retirement account. These documents are often so complicated that QDRO specialists are sometimes required to draft them.
What if I Cash Out My Retirement Accounts Before Divorce?
Not a good idea. If you do that, not only will you be required to pay penalties for cashing out the retirement plan early, but the value of the retirement account will still be part of the marital estate whether you spent it or not. In other words, your spouse can still recover half of the funds you cashed out regardless of whether or not you have access to them.
The best way to protect your retirement account is with a prenuptial agreement. Alternatively, retirement accounts can be protected by offering alimony or assets in equal share to that which would be signed over in the divorce decree.
Talk to an Indiana Divorce Attorney Today
Chris Arrington provides expert divorce counsel to couples who are looking to untie the knot. Call today to discuss your future goals in detail and we can begin preparing your filings immediately.