You have spent years building up your retirement accounts, so if you end up divorcing your spouse, you want to keep as much of a 401(k) or an IRA as you can. This means avoiding mistakes that could deprive you of money you would have otherwise kept from your divorce, such as dividing a retirement account by amount instead of percentage.
It may feel natural to go ahead and calculate an amount from your retirement account that you wish to keep. CNBC explains why specifying a percentage instead may benefit you.
How to divide your account
First, you should know the correct way to divide your retirement accounts or you may lose money to taxes and penalties. If you want to disperse money from your 401(k), you could incur a 20% withholding tax plus a 10% penalty for withdrawing money early if you are younger than 59 and a half. To avoid these expenses, you will need a court to approve a QDRO.
A QDRO is an order to split an asset that is separate from your divorce settlement. If you have multiple workplace retirement accounts, you will need a separate QDRO for each one.
Splitting an account by percentage
Whether you use a QDRO or your divorce settlement to divide your retirement accounts, consider basing your division upon percentage. If you intend to get 50% of an account, specify the percentage instead of putting in a dollar amount. The reason is that your account may post losses or gains after you draft a division order.
For instance, if you plan to receive 50% but your account has gained money, the amount you have specified might now be only 45%. If you divide an account by percentage, you will receive that percentage no matter how much your account grows. Addressing these and other potential problems may help you get the most from your retirement accounts in your divorce.