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What happens to 401(k)s and retirement funds during divorce?

On Behalf of | Feb 9, 2024 | Divorce

Those who are contemplating a Tennessee divorce often worry about what could happen to their finances. Most people have heard stories about divorces that lead to economic devastation, and the average person thinking about divorce probably prefers to avoid the worst-case scenario in which they suffer massive financial setbacks.

Particularly if someone is close to retirement or has saved aggressively for retirement in recent years, they may worry about what might happen with their retirement savings. Often, retirement accounts are held in the name of only one spouse. A 401(k), Roth IRA or similar account might be part of the marital estate in Tennessee if someone contributed to the savings using marital income.

What typically happens with retirement savings during a Tennessee divorce?

Couples may need to divide their accounts

The first step when estimating the impacts that a divorce may have on retirement savings is to determine how much of the retirement account is subject to division. There may be multiple different savings accounts, and each one may require a careful review.

Typically, deposits made during the marriage our potentially subject to division, but deposits from before the marriage may remain someone’s separate property. Once spouses have determined the marital portion of retirement accounts, they can then negotiate about how to share those funds.

Sometimes, spouses actually divide the retirement accounts. Doing so with a qualified domestic relations order (QDRO) can help someone avoid penalties. Early withdrawals from tax-deferred accounts like 401(k)s can trigger tax consequences and a 10% penalty. If spouses decide to divide the account but do so using a QDRO, they can potentially avoid the taxes and penalties associated with an early withdrawal.

Actually splitting the account isn’t always necessary. It is also possible to address the marital value of a retirement account by agreeing to other specific terms as part of the divorce negotiations. Vehicles, home equity and even personal property can help offset the financial value of a retirement account during Tennessee property division proceedings.

If preserving as much of the retirement account as possible is someone’s primary goal, they may need to propose compromises in other areas of the property division negotiations to achieve that goal. If spouses cannot reach a settlement on their own, then a judge can apply the Tennessee equitable distribution statute to their retirement savings and other marital assets.