In many divorces, the process of splitting up assets will be a major source of conflict between the former spouses. What one person views as a fair and reasonable request the other may view as a hardship. Understanding that Pennsylvania uses the equitable distribution standard means accepting the likelihood that you will have to split your retirement account even if your spouse never worked during your marriage or saved a cent for your golden years.
Unpaid work around the home influences the court’s decision regarding how they split up your assets, just like your individual earning potential will. Unless you already have an agreement that protects your retirement funds as separate property, it is likely that the Pennsylvania family courts will divide your retirement accounts as part of your divorce.
Will you have to take a loss for the early withdrawal?
When you put aside money in a tax-sheltered retirement account, like a 401(k) or 403(b), you make the deposit before you pay income taxes. In order to prevent people from raiding their retirement funds for other issues that arrive, there are substantial penalties that you have to pay for a withdrawal before you reach 59.5 years of age.
Additionally, you will have to pay the taxes for those funds at the time that you withdraw them from the account. Thankfully, those rules don’t necessarily apply if you split a retirement account as part of a divorce. However, in order to avoid those penalties and fees, the division of your retirement account must occur in compliance with a court order.
How the courts order you to split a retirement account
In some cases, the judge presiding over your divorce will look at the total value of the retirement account and use that as a guideline for splitting other assets instead of the account itself. However, for many couples, the most straightforward way to handle dividing a retirement account will involve splitting the account between the spouses.
The courts first determine what percentage of the account the spouse who did not contribute to it should receive, and then they issue a Qualified Domestic Relations Order as part of the divorce settlement. The couple presents the QDRO to the administrator managing the retirement plan. That individual will then split the account after creating a new account in the name of the second spouse.
Provided that the division is done in a timely manner and in accordance with the QDRO, the couple splitting the retirement account won’t have to worry about early withdrawal penalties, as long as the funds remain in the accounts until they reach the appropriate age.