Divorce and Early Retirement Account Withdrawls
By: Gordon & Perlut, LLC
If you are planning to file for divorce in Chicago, or if you are in the early stages of one, you may be wondering how the court will handle your retirement benefits in your divorce. You may have questions about the costs associated with distributing those assets between yourself and your spouse, and you likely have questions about whether such a distribution will be necessary.
According to a recent study conducted by economists at the University of Michigan and the University of Delaware, divorces are one of the major driving forces in early retirement withdrawals. We want to discuss the findings of the study and to provide you with more information regarding avoiding penalties associated with early retirement withdrawals in a divorce.
Divorces Drive People to Dip Into Their Retirement Accounts
As the study explains, most Americans with retirement accounts have what are known as “defined contribution” plans. With a defined contribution plan, like a 401(k) account or an IRA, an employee contributes a defined portion of his/her paycheck into the account. Many employers match employee contributions up to an amount. A defined contribution plan is different from an employer-funded pension plan, which is known as a “defined benefit” account. With a defined benefit account, the employee is guaranteed an amount of money or income upon retirement. Defined contribution plans give employees more flexibility when it comes to early withdrawals. Yet early withdrawals do typically come with a 10 percent penalty – in addition to having to pay income tax on the amount withdrawn.
While you might think people would dip into their retirement accounts to fund a major purchase or home repair – or even to compensate for a job loss, the rate of using retirement funds in a defined contribution plan is highest for those who are getting divorced. The study determined “divorced households are 9.5 percent more likely to access ‘fast cash’ by cashing in retirement savings,” and those same households are “11.8 percent less likely to continue contributing to a retirement savings plan.” To compare those numbers with households that have recently experienced a job loss, losing a job only increases the chances of withdrawing from a retirement account by about 3.5 percent.
Retirement Account Withdrawals with a QDRO
If you are getting divorced and need to withdraw money from a retirement account, you may be able to do so as part of your divorce settlement without paying the 10 percent penalty. When you get divorced, a Qualified Domestic Relations Order (QDRO) can allow you to take out a portion of your retirement benefits to distribute to the other spouse, for example, without paying the 10 percent penalty.
However, if you simply want or need to dip into your retirement account in order to pay for a new home as a result of your separation, or to pay legal fees related to your divorce case, you may need to anticipate that 10 percent penalty. A divorce lawyer can speak with you about your options.
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