Divorce will bring significant financial changes for both spouses, and it will likely require both parties to make some adjustments in lifestyle and future expectations. This is particularly true for retirement accounts. It may be prudent for a person facing the prospect of divorce to understand how the process works for retirement accounts in property division and what it could mean for his or her retirement plans.
How Is Property Divided In A Texas Divorce?
Texas law requires the equitable distribution of community property in a rough 50/50 split after a divorce. Marital property and any property acquired by either spouse during the marriage will be considered community property. The court does not consider separate property while determining the appropriate distribution of marital property.
Separate property includes any property acquired before the marriage and after the divorce. It also includes certain exceptions such as inherited property, gifts and personal injury awards.
Rules can vary state by state. Some states practice the rule of equitable distribution. They consider both marital property and separate property of each spouse when deciding how to divide marital property in a divorce.
Is Retirement Considered Marital Property?
The portion of retirement assets earned during the marriage is considered marital property. This includes a pension plan, 401(k) or IRA. In a divorce, your ex-spouse and you both have a share of all monetary contributions, losses and gains in the account during the years of your marriage.
The only exception is if you and your spouse signed a prenuptial agreement where agreement terms clearly state that a pension or retirement accounts are not considered marital property.
To keep any portion of your retirement assets, you have to find out the value of retirement account before marriage and provide evidence. Retirement assets before marriage are separate property. The Texas family law court cannot divide it between spouses since they are not considered marital property.
You will need to have the following:
- Most recent account statement
- Statement from the month before the marriage that shows your balance at the time
- Start date
- Any contact information for your plan administrator.
Your divorce attorney may provide further advice on your case.
How Is Retirement Divided In Divorce?
When a Texas couple divorces, they will have to divide all marital property. This includes retirement savings accumulated over the course of the marriage, which can be a substantial amount if the couple was married for a long time. A person interested in protecting his or her interests in divorce will need to know what types of accounts are subject to division, their classifications and how money is paid out from those accounts.
Whether a couple agrees on the terms of property division or a court will decide, there are specific rules in place that determine how retirement assets are addressed. Most are either qualified or nonqualified. Qualified are often tax-deferred accounts, such as a 401(k). It takes a specific type of court order to split these accounts properly and pay a portion to someone else. These are known as a Qualified Domestic Relations Order or QDRO.
Dividing retirement accounts in a Texas divorce can be especially complex and confusing. It may be beneficial for a person to seek an explanation of his or her rights regarding retirement assets in property division before agreeing to any terms. A fair division of all types of long-term savings is crucial to a person’s financial security and stability in the future.
Spouses can negotiate how to split the retirement account. Sometimes one spouse may agree not to claim funds from their former spouse’s retirement plan in exchange for other assets. A settlement agreement will document the arrangement as part of a divorce or legal separation. The judge will sign the agreement if it deems the distribution between spouses to be fair and equitable.
The court will make the decision if spouses cannot agree on the division.
Qualified Domestic Relations Orders
A defined benefit plan such as a pension plan or a 401(k) will require a Qualified Domestic Relations Order (QDRO) before the retirement account can be divided. It is a legal document that contains specific provisions that may be unique to an employer’s retirement plan. The document will be sent to the retirement plan’s administrator. The QDRO provides the directive for an employer to pay a portion of the benefits derived from a defined benefit plan like a pension or a 401(k) plan to the other spouse.
The QDRO typically contains the following:
- Date of the division of the account
- Amount or percentage awarded to each spouse from defined benefit plans (pension) or 401(k) plans
- Spouse responsible for any loans against the account
An attorney may also advise you to submit a QDRO to the retirement plan administrator for approval before you ask the judge to sign the QDRO. Administrators often recommend certain QDRO templates and you may not be able to ask the judge to adjust the terms once they have signed the QDRO. Typically, the spouse receiving the funds will pay the legal fees associated with the QRDO to the attorney.
An IRA does not require a QDRO to divide the assets between spouses. The divorce decree or settlement agreement is sufficient to facilitate the transfer of funds.
For non-qualified plans, administrators cannot pay to spouses even if there is a legal order requesting it.
Transfer Of Funds
For a 401(k) plan, the employer may transfer the funds within 30 to 90 days in a lump sum payout. For defined benefit plans such as a pension plan, the QDRO will indicate the calculation of a percentage that the employer must apply when payments begin. The employer must send the amounts to the spouse according to the court order.
Other Considerations
Even if people understand their rights and exercise them properly, there may be additional implications that may affect the outcome.
One consideration is that a 401(k) and an IRA can have different tax implications. Post-retirement withdrawals from an IRA will not be subject to tax. This may be more favorable for you depending on your circumstances.
If you have come to an agreement with your spouse to give up their pension or 401(k) in exchange for other assets, these assets may have additional costs or potential losses in value which can outweigh their benefits. For example, getting the family home will give you a sense of stability but can be expensive to maintain.
You also have the option to transfer funds from divided assets into a rollover IRA or withdraw it directly. Sometimes spouses have a one-time chance to withdraw funds without a tax penalty. This may have more benefits for you if you need liquid funds.
An experienced attorney or law firm can provide you legal advice specifically for your situation.
Can I Get Half Of My Husband’s Retirement?
You may receive half of your husband’s retirement that he accumulated during the marriage. However, the court retains the right to determine the percentage that you or your spouse will receive as part of a fair and just division.
You might have focused on running the household and taking care of the children without earning an income for the years of your marriage. As the non-working spouse, you have no retirement account or pension in your name so you have no savings to fall back on as you grow older. You might worry about your future after your divorce.
However, community property laws in Texas dictate that retirement savings accumulated by your former spouse during marriage will be divided between both of you during a divorce.
Texas state family law permits the division of retirement benefits. The courts may consider the following factors when dividing the funds in the account between spouses:
- Value of retirement benefits and assets
- Portion of the value and funds accumulated during the marriage
- Percentage or amount that each spouse should receive to be fair and equitable
You do not have to directly contribute to the retirement assets or pension in order to have the rights to the funds in a divorce. A qualified domestic relations order (QDRO) will compel plan administrators to pay you a share of your husband’s retirement assets according to the court order.
There can be complexities because not all retirement plans will be subject to a QDRO. There is also no standard QDRO documentation for every type of plan.
Protecting Your Rights
Retirement accounts are often the most valuable assets that many people own. An experienced attorney can inform you of your rights for retirement assets in the property division. They can draft an agreement that will protect your assets while considering tax implications.
Let the award-winning Family Law experts at Sean Lynch help you prepare your legal case. We have years of experience in family law in the state of Texas.
Contact us today for one no-cost case review.