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Must someone divide their retirement savings during a divorce?

On Behalf of | Mar 13, 2024 | Divorce

Financial worries often hold people back from filing for divorce. Despite feeling unhappy or even trapped in their marriages, many people try to work on their struggling relationships in part because they fear the financial consequences of a divorce.

Especially if someone is getting close to retirement, they may worry that divorcing now might prevent them from leaving their job or really enjoying their golden years. They may worry about being unable to afford their basic expenses if they must share their retirement savings with their spouse. Does someone typically need to divide their retirement savings when they decide to divorce in Indiana?

Retirement savings are often subject to division

Couples have to divide their marital property but can maintain sole ownership of their separate property. Separate property may include assets owned prior to marriage and inheritances left to either spouse. If one spouse started their retirement account prior to getting married, that does not automatically mean that the account is their separate property. Usually, only the deposits made prior to marriage are separate property for the purposes of asset division in Indiana. The amounts contributed during the marriage may factor into the equitable property division process.

Penalties are often preventable

One reason that people may prefer to avoid the division of their retirement accounts is the possibility of penalties and taxes. There can be tax consequences for premature withdrawals taken from tax-deferred retirement accounts. There may also be early withdrawal penalties that further diminish the account’s value. If spouses do agree to divide the account or must do so because of a court order, they can have a lawyer draft a qualified domestic relations order (QDRO).  A properly-executed QDRO can prevent the loss of funds to taxes and penalties when dividing retirement savings between the two spouses.

Dividing an account is not necessary

While the account may play a role in the property division process, there is no rule that says couples absolutely must divide every single shared asset in an Indiana divorce. Many couples simply factor in the value of specific assets when negotiating property division terms. Each spouse might agree to keep their own retirement savings accounts. Other times, people can offset the value of marital contributions to a retirement savings account by using other valuable assets.

If spouses don’t reach their own settlements about property division in an Indiana divorce, then a judge may decide for them how they should share their assets and debts. Learning about what assets are vulnerable to division during divorce may help people set better goals for their upcoming proceedings.