What you need to know about divorce and your retirement account

If you are facing a divorce, you know that your entire life is in a moment of change. What you might not realize is the way that change can alter your plans for the future, even far-off plans that might not seem as immediately important in the wake of everything else you need to do to get your life reorganized so you can move forward. This leads many people to neglect to pay attention to what their divorce might do to their retirement accounts, and that can be a costly mistake once everything is settled.

How retirement accounts are split in Alabama

There are two general ways that states divide property in a divorce: community property and equitable distribution. Alabama happens to be in the second group, and that means when you get a divorce, the state assumes that both parties hold on to the assets and property they had coming into the marriage. From there, debts and assets are divided equitably according to what was accumulated together and with regards to the obligations and commitments each spouse has in the divorce.

This means that some of your retirement accounts may be untouchable in a divorce; or at least, the portions you invested before getting married will be. For the rest, it is important to understand how to make the split as inexpensive as possible, and how to work together to make sure everything is processed correctly.

Understanding how to divide funds

Generally speaking, the court will order how the funds need to be divided without providing a lot of guidance with regard to how this should happen. Since many retirement accounts have tax penalties for early withdrawal, you need to find ways to roll the funds into new accounts without exposing yourself or your ex to those penalties. That is done in a few stages:

  • Research the specific fund type; 401ks and IRAs have different requirements.
  • Both QDROs and transfers for IRAs have options that do not expose you to tax penalties.
  • In both cases, the resulting paperwork lets you name a recipient for the funds to be transferred to.
  • Make sure that any transfers you make are properly defined to ensure there is no problem avoiding those tax penalties.

Conclusion

Going through a divorce is never easy, and preserving as much of your retirement savings as possible is a multi-step effort. To make sure you retain as much of your progress toward your nest egg as possible, it’s important to work with an attorney who can help you correctly identify the assets that you are entitled to and the ways you can avoid excessive penalties and losses of value during the divorce process.

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