Filing for divorce is a complex legal process that requires the expertise of an attorney. When assets are divided, certain ones may lose their tax-exempt status. To help you navigate the complicated tax laws regarding assets, particularly in regards to retirement savings, here’s a brief guide. 

What Happens to Retirement Savings in a Divorce?

Savings That Predate the Marriage

The first point your attorney will discuss with you is whether or not you had any retirement savings before you were married. For instance, suppose you have $100,000 in your traditional IRA, but you had saved $25,000 of that money before you got married. In that case, only $75,000 would be considered community property and your lawyer may advise separating those funds into a new account.

Withdrawal Process 

As a part of the divorce settlement, your attorney may arrange for you to receive a portion of your spouse’s retirement savings. Even though this will be stated in the settlement, it won’t spare you or your spouse the penalties and taxes associated with early withdrawal.

However, filing a QDRO, or Qualified Domestic Relations Order, will help you avoid those penalties. This order allows the settlement percentage of the 401k or similar account to be withdrawn or rolled over into a new IRA account while maintaining tax-exempt or tax-delayed statuses.

Post-Settlement 

Once the settlement has been carried out, your retirement savings will be significantly diminished. You may need to increase your monthly contributions and work more closely with your financial advisor to recoup what you lost. You may need to reorganize your monthly budget to help you increase savings and ensure you have more money to invest, too.

However, you’ll be managing a smaller household, which may help cut many of your monthly expenses. If this is the case, you can use those savings to recover the ones you forfeited in the divorce.

Darryl L. Jones, Attorney at Law in Alaska has been handling personal injury, criminal defense, and family law matters in Anchorage, Palmer, and the Matsu valley area since 1988. If you are going through a divorce and need an attorney skilled in asset division and child custody, their legal team can help you. To learn more about their areas of practice or schedule an initial consultation, call (907) 746-9851.