What happens to your retirement accounts in a divorce?

With the exception of your marital home, your retirement accounts are probably the most substantial assets you have acquired during your marriage. It’s only reasonable that you want to protect them and your ex wants their fair share when you divorce.

Although the account may be held in the name of only one spouse, the courts will typically expect spouses to divide retirement benefits accumulated during the marriage as part of the asset division process. The funds vulnerable to division could include pension benefits, contributions to an employer-sponsored retirement account and even employer matching funds.

Prenuptial or postnuptial agreements can protect your retirement or pension

If you sign a prenuptial agreement or have decided to execute a postnuptial agreement because of marital discord, those documents will guide your divorce proceedings and allow for a faster, uncontested divorce filing, in most cases. If you and your ex decided to earmark your individual pensions and retirement accounts as separate property in these documents, the courts will often uphold valid marital agreements and choose not to divide retirement funds or pensions.

Division in divorce is not the same thing as an early withdrawal

One reason people give for worrying about splitting up their retirement funds is the potential for incurring early withdrawal fees and penalties. Especially if you made pre-tax contributions to the account, you may face significant financial penalties for pulling funds out of a retirement account before you reach a certain age.

Thankfully, when the courts order the division of your retirement funds, they do so via a Qualified Domestic Relations Order (QDRO). This document instructs your plan administrator to open a second account in the name of the spouse receiving some of the benefits and deposit a specific percentage of the retirement funds directly in the account. There are no penalties assessed when the division of retirement funds occurs in compliance with the QDRO issued by the courts.