How are retirement accounts affected in divorce?

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How are retirement accounts affected in divorce?

One of the first questions people have when they start thinking about divorce is how the end of their marriage will affect their finances. Most people have heard horror stories about people losing so much property that their standard of living drastically shifts, and such tales might deter people in unhappy marriages from moving forward with a divorce filing.

Retirement accounts are often a focal point for people’s financial concerns during a divorce. After all, their savings are likely a reflection of what it would take to support two people living in one house. A divorce could mean major changes to an individual’s retirement plans.

Couples often have to split their savings

State law determines what you must do with your marital property, which means that you’ll need to consider the equitable distribution standard if you’re divorcing in New Jersey. Equitable distribution means dividing your property fairly. Assets either spouse purchased and income that either earned will generally be treated as part of the marital estate and will be subject to equitable division during the divorce process.

Contributions to a retirement account made during the marriage are typically considered to be marital property. One spouse may be able to protect the amount contributed before the marriage as separate property, but the balances accrued during the marriage, including interest payments and deposits made by employers, will likely be subject to division.

Couples don’t technically have to split the value of an account to equitably divide their marital estate. The spouse who owns the account can simply disclose its value and use that as a starting point when negotiating other property division terms. One spouse might keep the retirement account, while the other keeps the marital home or other property, for example.

Couples don’t have to accept penalties and fees

In scenarios wherein you do divide an actual retirement account, a qualified domestic relations order (QDRO) can allow for the faster division of the account without any penalties or taxes.

Some people find that working for a few extra years will allow them to achieve the same standard of living they had previously hoped for during retirement. Others may decide that they would rather make some compromises, such as living in a lower-cost area or living with family, so that they can retire as scheduled.

The potential impact on retirement is no reason to shy away from a gray divorce when someone has spent many years married and is now close to the end of their career. Preparing carefully and being realistic about the consequences of the property division process can help adults reduce the impact that divorce may have on their financial stability during their golden years.