Figuring out how to split up assets in a divorce is commonly a point of contention between spouses. Many times, people focus on dividing the house. After all, the marital home is probably the single biggest investment you have made during your marriage.
There are other valuable assets that you shouldn't overlook, including your retirement fund or pension. Many people have preconceived notions about what will happen to their retirement in a divorce, but many times those ideas are not based in reality.
Most times, you will end up splitting your retirement fund
If you worked through your entire adult life and your spouse stayed at home, that means the retirement account is in your name. You probably think that if the account is in your name, you get to keep what's in it. This is definitely not the case.
The court will be more interested in when you made deposits and when your employer sent matching amounts, not whose name is on the account. After all, even if it is in your name or from your employer, if it came in during your marriage, it is marital property. That usually means you have to split it with your spouse.
Unless you have a legally binding prenuptial agreement that protects your retirement account, you can expect your spouse to have a claim to roughly half of the amount accrued during your marriage.
You will probably need to adjust your retirement expectations
If you are close to retirement age when you file divorce, it could mean losing a substantial amount of the money you have set aside for that time in your life. As a result, you will have to decide to either postpone your retirement while you recoup those funds or change your retirement plans to reflect the lower amount you have to work with.
The good news is that unlike other forms of early withdrawal, splitting your account in divorce won't result in penalties and fees. Most tax-deferred retirement savings plans have penalties, fines and fees assessed in the event that someone withdraws funds prior to retirement age. Thankfully, in the event of a divorce, the fees will not apply to the division of your account. So long as everything is handled according to the court order, there will not be financial penalties.
A QDRO allows for a penalty-free division of retirement accounts
The courts will issue a Qualified Domestic Relations Order (QDRO), which is a special divorce order that authorizes the account manager to split your retirement account. A certain percentage of the account will go directly into an account held by the other person, in this case, your spouse.
Overall, it is a relatively simple process. So long as you properly prepare for this outcome, splitting your retirement account or even your pension benefits does not have to totally ruin your plans for retirement.