At some point in a marriage, ideally as early as possible, a couple will take steps to prepare for the future. Specifically, they will begin to save for their retirement using one or more of the tools available, such as a 401(k) or an IRA. If you and your spouse have taken this important step but are now heading for divorce, those retirement funds can be a source of contention during property division.

In Minnesota, which is an equitable distribution state, any assets you obtained during your marriage are fair game for asset division. This means that retirement funds you accrued from the day of your wedding could possibly be equitably divided between you and your spouse. However, it is not as easy as withdrawing the money and splitting it. There are penalties and tax ramifications to consider.

The benefits of QDROs

For dividing some retirement accounts, such as a traditional 401(k), a Qualified Domestic Relations Order is important. A QDRO is a court order that authorizes your plan administrator to distribute funds from your account to a qualified relation of yours — in this case, your former spouse.

Using a QDRO may help you avoid early withdraw penalties. However, it is critical that you understand how tax laws will affect any transfer or withdrawal of funds for the particular kinds of retirement accounts you own. For example, one option for keeping the funds tax-deferred may be to move them to a rollover IRA.

Keep your future in mind

Even if you and your spouse each have your own retirement accounts, the courts will look at the amounts in each account. If one of you has considerably more saved, it is possible that the court will order the transfer of some of those funds to the spouse with the lower amount. On the other hand, it may be possible to offer other assets in exchange for keeping your retirement account intact. This is essentially how equitable distribution works.

Be aware that any money you saved toward your retirement before you got married is your individual property, so you will want to protect it from property division during your divorce. In fact, since divorce often means serious financial setbacks, at least temporarily, protecting your retirement accounts is a smart way to secure your future. It is a good idea to seek sound advice to get the best possible results from asset division.