When spouses who are relatively wealthy have determined that their union is at an end, deciding how to prioritize different assets quickly becomes a consequential matter of course. If you find yourself navigating such circumstances, you may – very understandably – be wondering which assets to prioritize as you negotiate or litigate your case.
Certainly, any truly meaningful personal property is likely a concern at the forefront of your mind. But what about financial assets? Should you prioritize retirement funds as you move forward? While there is no “one-size-fits-all” answer to this question, it is likely that the short answer to this query is a solid “Yes.”
The long-term value of retirement funds
Retirement funds are often one of the most significant assets a couple has accumulated over the years. Given that you are relatively wealthy, it is likely that these funds, which may include 401(k)s, IRAs, pensions and other retirement accounts, represent a substantial portion of your future financial security.
Unlike other assets that can be used or liquidated in the short term, retirement funds are specifically designed to provide income during your later years. Therefore, ensuring that these assets are carefully considered and fairly divided could prove consequential when it comes to maintaining your long-term financial stability.
Mitigating tax liability
Retirement funds are often tax-deferred, meaning that taxes are not paid until withdrawals are made. If not handled properly, the division of these assets can lead to significant tax liabilities. For example, if you or your spouse withdraws money from a retirement account before reaching the eligible age, you may face early withdrawal penalties in addition to regular income taxes.
Partially due to the risk of tax liabilities and penalties, in many cases, dividing retirement funds requires a Qualified Domestic Relations Order (QDRO). A QDRO is a legal document that instructs the retirement plan administrator on how to divide the retirement assets between the divorcing spouses. Without a QDRO, transferring retirement funds can result in penalties and taxes that could otherwise have been avoided.
Partially due to their consequential nature, and partially due to the complexities at issue, it is generally wise to seek legal guidance proactively when determining how to approach retirement assets in a high-asset divorce scenario. Making this effort is a step that your future self just might thank you for.