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Will a Maryland divorce trigger retirement account penalties?

On Behalf of | Jan 7, 2024 | Property Division |

Maryland divorce proceedings usually require property division discussions. The spouses either need to reach their own agreements about splitting up the marital property or presentation so that a judge can divide their property.

Assets that represent a larger total financial value or that influence someone’s future economic stability are often the biggest sources of conflict in Maryland divorces. People disagree about how to value certain assets and how much of that value may be part of the marital estate. 

Retirement accounts can contain tens of thousands of dollars and are often crucial for people’s comfort later in life. Spouses may need to divide retirement savings when they divorce even if the accounts are solely in the name of one spouse. Do those dividing retirement accounts during Maryland divorces have to worry about penalties? 

Some accounts impose early withdrawal penalties

Certain types of retirement savings accounts offer tax benefits for individuals. They can make pre-tax contributions to the account, thereby diminishing their taxable income. When they make withdrawals after retirement, they then need to pay the taxes due on those amounts. 

Additionally, there are penalties possible if someone withdraws funds from a retirement account before they reach retirement age. An early withdrawal from a 401(k) or Roth IRA typically leads to a 10% penalty calculated based on the amount withdrawn prematurely. Those already concerned about diminishing their retirement resources by divorcing likely fear the idea of paying large penalties in addition to splitting the balance of the account. 

Thankfully, penalties are not automatic if someone divides the account during a divorce. Provided that they follow the right process, divorcing spouses in Maryland can eliminate taxes and early withdrawal penalties when splitting retirement savings. They need one of their lawyers to draft a qualified domestic relations order (QDRO). 

The document requires approval and signatures before submission to the business or professional managing the account. When used properly, a QDRO can eliminate the penalties and taxes people typically need to pay when they withdraw funds from a tax-deferred retirement account before reaching retirement age. 

Learning more about the rules that govern property division during Maryland divorces may help people preserve their most valuable assets during a time when they likely feel financially vulnerable.


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