When you are considering divorce in Texas, you will have to divide your assets that include you or your spouse’s 401k, IRA, pension, and any joint retirement accounts opened in whole or part with marital funds. This is due to federal law. This can be a very complex process requiring extensive knowledge of the law, so it is important that you retain the services of a Texas divorce attorney.
Marital Property and Your Retirement Investments
A retirement account division isn’t always simple because employment income during a marriage is marital property and that includes contributions to retirement accounts. Both spouses have entitlement to the accounts, but simply dissolving them and incurring penalties to divide assets might be in neither spouse’s best interest. A Texas divorce attorney can assist you in determining marital and non-marital property, including retirement investments.
Both spouses should note that monies invested in different types of retirement accounts might not hold similar worth. For example, if you have $100,000 in a Roth IRA and your spouse has $100,000 in a 401k, the values after taxes and penalties are different. The combined marital assets are closer to $140,000. This sum doesn’t account for subtracting non-marital property; a Texas divorce lawyer can help you determine exact numbers based on your investments and the best way to divide them.
When dividing assets, a divorcing couple generally believes they’ll each receive half in a divorce settlement. This is rarely the case with retirement accounts that began before the marriage and especially if you or your spouse made more contributions after a physical separation. Those periods do not fall under marital property, so the account holder maintains those investments and only the monies added during the course of your marriage become subjected to division of assets.
What is a Qualified Domestic Relations Order (QDRO)?
The IRS defines QDRO as “A judgment, decree, or order for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant.”
In simpler terms, a QDRO instructs a plans’ administrator how to pay the other spouse or beneficiary and protects their interest until they can withdrawal. It also protects the account holder by limiting the amount the other spouse can take.
This three-step process does require you to have a final divorce decree that explicitly outlines division of your retirement accounts. It must comply with the federally mandated Employee Retirement Income Security Act, a family court judge must sign the order, and the retirement plans’ administrator must agree and sign the QDRO.
However, other factors play in here, specifically state law. Texas uses a formula to determine attributable benefits to a spouse. A divorce attorney can assess your financial records and help you determine if a QDRO is in your best interest.
Spouses can also agree that each retains their separate retirement accounts or that they will not consider them for distribution. A family court judge must agree to this joint decision and your agreement must adhere to the state and federal law. Furthermore, your plan administrator must also agree and sign off on the order. Consulting with a Texas divorce lawyer when you and your spouse have reached an agreement is still in both of your best interests.
Divorcing spouses might also wish that their divided retirement assets be used for their children or dependents. In this case, you will need a QDRO too. Again, both your judge and plan administrator must agree to and sign the QDRO.
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