This special document can protect retirement savings in a divorce

On Behalf of | Feb 6, 2024 | Divorce

Divorcing couples in Virginia often have a lot of questions about the future. They know they have to share their resources and debts, and they may be uncertain about what that process may involve. Virginia, like most other states, has an equitable distribution statute. If spouses go to court to divide their property, a judge looks over an inventory of marital debts and assets and learns about the couple’s circumstances.

The judge then decides how to divide those resources and obligations in a fair or equitable manner.  Almost all property and income acquired during the marriage is subject to equitable distribution in the event of a Virginia divorce. Retirement savings are often among the assets that contribute the most to someone’s concerns about the future.

They may worry about needing to share their retirement savings and also about whether dividing the account might lead to penalties and taxes. Yet, those who utilize the right documents can reduce the risk of major retirement setbacks during a divorce.

Penalties are a reasonable concern

There are numerous rules in place to prevent people from withdrawing funds from their retirement savings prematurely. If someone uses a tax-sheltered account like a 401(k) or Roth IRA, there can be taxes due when they pull money from the account. Distributions made while someone still has a job could trigger massive tax liabilities. Additionally, it is standard to assess a 10% penalty for early withdrawals from retirement savings accounts.

Thankfully, those who split their retirement savings as part of a Virginia divorce can avoid penalties and taxes if they use the right paperwork. A qualified domestic relations order (QDRO) allows for the penalty-free division of retirement savings even if it is still many years before someone can officially retire. The person managing the retirement savings account can move a specific percentage of its balance to a new account created in the name of the other spouse.

Neither spouse has to worry about penalties or taxes as long as the funds remain in the retirement accounts after that transfer. A QDRO is not automatic during divorce proceedings. Typically, spouses need to arrange to have one of their lawyers draft the document, and then both spouses need to sign and approve it before submitting it to the party responsible for managing the account.

Those who forget to draft or properly record a QDRO may set themselves up for a frustrating or disappointing process later, especially if their spouse has a history of engaging in inappropriate financial conduct. In most cases, the sooner that people tend to drafting and recording a QDRO, the better.

Ultimately, using the right paperwork can make a major difference for those preparing for an upcoming Virginia divorce.