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How to address retirement savings during an Alabama divorce

On Behalf of | Dec 26, 2023 | Property And Debt Division |

The decisions that people make during a divorce can affect their financial stability and lifestyle for years to come. Financial resources acquired during the marriage are at risk of division during the divorce unless couples already have an agreement in place. Either the spouses negotiate their own property division settlement or they ask a judge to apply Alabama’s property division statute to their assets. Almost all shared resources could be subject to division during the divorce.

Retirement resources can be of crucial importance for someone’s financial stability during their golden years. What typically happens to retirement savings during an Alabama divorce?

At least some of the account may be subject to division

Although retirement accounts are often only in the name of one spouse, they may technically be marital property. Couples typically commit a certain amount of weekly income, which is marital income, to fund the account. That means that a portion of the retirement account is subject to division. Spouses may need to go over the financial records for each retirement account to determine which deposits predate the marriage and which occurred during the marriage. They can then determine how much of the account is marital property and how much is separate property.

People can avoid losses when dividing the account

Withdrawing funds from a 401(k), Roth IRA or similar retirement account could lead to financial penalties. Typically, people have to pay a 10% penalty on any early withdrawal in addition to any taxes due on that amount. However, it is possible to avoid those penalties and taxes through the use of a qualified domestic relations order (QDRO).

A QDRO can facilitate a penalty-free account division even if spouses split the retirement savings decades before retirement. A QDRO allows the plan administrator or investment professional to divide the account into two separate accounts in accordance with the property division order. Neither spouse has to pay taxes or penalties for dividing the account during the divorce if they use a QDRO properly.

While a loss of some retirement resources during a divorce is common, people can mitigate the total amount lost. Seeking legal guidance proactively can facilitate the realization of this important goal.