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The likely impact of a divorce on your retirement savings

Whether you're divorcing in your 40s or in your 60s, the process can have a profound impact on your financial situation. Court costs and attorney fees can quickly add up, diminishing your liquid capital and savings accounts. Assets that you once took for granted, like the equity in your home, are now subject to division with your spouse.

When planning for retirement, you were expecting to share a residence with your spouse and potentially benefit from two retirement funds/pensions, as well as Social Security. Now, however, the same amount of money will need to cover two households and all your individual living expenses. It can be difficult to make up the difference between what you need to retire comfortably and what you will have left over after divorce.

Equitable distribution of assets will include retirement accounts

New York divorces involve equitable distribution. Regardless of whose name is on the account, if you regularly made deposits into a retirement account during your marriage, the account is subject to division with your spouse during divorce. Even if your spouse didn't contribute at all to the account or didn't work a job outside the home, the account will likely still get split.

The reason why is simple. Even if your spouse stayed home, doing so contributed to your ability to work a job and earn a strong wage. The unpaid work of a spouse at home, ranging from around-the-clock childcare to cooking, cleaning and household maintenance are all quite expensive services if purchased from outside professionals. In order to make the division of your assets fair, the courts will look at when the assets were acquired, not whose name is on the purchase agreement or account.

You can split your retirement account without penalty after a divorce

The good news is that even if you are far too young to make a withdrawal from your retirement account without a penalty, you can split the account due to divorce. There are special forms and processes involved in dividing retirement accounts due to a divorce. A Qualified Domestic Relations Order (QDRO) allows you to have your Roth IRA, 401K or other retirement account split between you and your spouse without penalties.

In some cases, you could decide to weigh the value of your retirement account against other assets, such as the equity in your home. Other times, the courts will order a split. Regardless of which happens, you should begin planning to rebuild your retirement funds as soon as possible. Working overtime or even picking up a part-time job can help. Otherwise, you may have to consider changing your planned retirement age or activities and living arrangement to reflect the decrease in your retirement fund.

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Arnel Law Firm

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