Divorce And Retirement Funds: What You Need To Know About Taxes

Going through a divorce means navigating a lot of life changes—emotional, legal, and financial. One area that often gets overlooked in the midst of all that transition is what happens when you’re awarded retirement funds as part of your divorce settlement. If you have questions about divorce and retirement funds or other family law matters, New Beginnings Family Law’s Alabama divorce lawyer is available to help.

After a divorce settlement is finalized, many people are left wondering:

• “Can I use that money right away?”
• “Will I have to pay taxes if I withdraw it?”
• “What are the consequences of cashing it out?”

We believe that clarity brings peace of mind. When it comes to retirement funds, understanding the tax implications before making any financial moves is absolutely essential.

Retirement Funds Aren’t “Free Money” After Divorce

While your divorce settlement may grant you a portion of your ex-spouse’s retirement account, that doesn’t mean you get a pass on taxes. When you take a distribution from a retirement account, it is treated as income—regardless of whether you earned the funds or received them through a divorce.

If you decide to withdraw those funds immediately, expect to pay regular income taxes on the amount you receive. And if you’re under the age of 59½, you may also face a 10% early withdrawal penalty. However, there is a way to avoid the penalty, and it’s called a Qualified Domestic Relations Order, or QDRO.

What Is A QDRO, And Why Does It Matter?

A Qualified Domestic Relations Order (QDRO) is a court order used to divide certain retirement accounts—like 401(k)s and 403(b)s—during a divorce. When structured properly, a QDRO may allow the non-employee spouse to access funds without paying the 10% early withdrawal penalty. Keep in mind, however, that income taxes still apply unless the funds are rolled over into another qualified retirement account, like an IRA.  However, if the retirement funds were originally held in an IRA, a QDRO is not necessary and the 10% withdrawal penalty exception generally does not apply.  However, you should always confer with your tax accountant or a tax attorney to get the most current advice about early withdrawals .

A QDRO must meet specific legal requirements, and mistakes in the wording or execution can delay access or trigger unintended tax consequences. That’s why it’s so important to have experienced legal and financial professionals guide you through this step.

Work With Financial Experts To Create A Post-Divorce Strategy

We’re family law attorneys—not tax professionals. But we work closely with experts who are. Whether you were awarded a portion of a retirement account or are trying to determine the best way to use your settlement to move forward, we strongly encourage you to meet with:

• A Certified Divorce Financial Analyst (CDFA)
• A financial planner
• A tax advisor or CPA

These professionals can help you:

• Understand the true tax impact of different withdrawal or rollover strategies.
• Avoid unnecessary penalties.
• Create a long-term financial plan that supports both stability and growth.
• Make informed decisions during a vulnerable time.

A CDFA, in particular, specializes in the financial aspects of divorce. They can analyze your settlement and help you understand the long-term effects of your financial decisions, from asset division to spousal support.

Divorce Is Hard—Don’t Let Taxes Make It Harder

It’s easy to feel overwhelmed after a divorce. But rushing into financial decisions—especially with large sums like retirement funds—can lead to long-term consequences. We’ve seen it happen too many times: people withdraw funds for short-term needs, only to face a hefty tax bill later.

Taking a thoughtful, informed approach helps ensure your settlement supports the life you’re rebuilding—not one that adds more stress.

Your Future Deserves A Plan

At New Beginnings Family Law, we’re here to guide you not just through the legal process of divorce—but through the next chapter of your life. That includes helping you connect with financial professionals, understand your rights, and protect your future. You’ve already done the hard part. Now let’s make sure your financial decisions reflect your goals and safeguard your fresh start. Reach out to us today.

New Life. New Direction. New Beginnings.