How Are Retirement Accounts Handled in a Texas Divorce?

 Posted on May 12, 2023 in Divorce

When a couple makes the decision to end their marriage, there are many issues that they need to address. One of the most complex of those issues is the division of assets. Part of those assets often include retirement accounts, such as 401(k)s, IRAs, and pensions. These accounts can be a significant part of a couple's financial portfolio, and they can be particularly difficult to divide because of their tax implications and complex rules. The following information is a brief overview of how retirement accounts are addressed in divorce. For more detailed information, speak with an experienced divorce attorney.

Marital Estate

Under Texas family law, retirement accounts are considered marital property if they were acquired during the marriage. This means that they are subject to division in a divorce. However, the specific rules and procedures for dividing retirement accounts can vary depending on the type of account it is. Retirement accounts are different than regular savings and checking accounts and funds cannot just be withdrawn at any time.

Because of the regulations that are associated with retirement accounts, any division of the account between the spouses is done under court order. This order is referred to as a qualified domestic relations order (QDRO).

Under a QDRO, the retirement account is divided into two separate accounts, one for each spouse. The spouse who is receiving a portion of the retirement account is known as the alternate payee. The alternate payee can choose to keep the funds in the same type of retirement account or roll them over into another retirement account. However, it is important to note that any distributions from the account will be subject to taxes and penalties.

Another method of dividing retirement accounts in divorce is called a cash-out. This means that one spouse receives a lump-sum payment from the retirement account in exchange for relinquishing their claim to any future benefits. Cash-outs are generally only allowed for certain types of retirement accounts, such as IRAs, and they may also be subject to taxes and penalties.

The division of retirement accounts can have significant tax implications. For example, if a spouse receives a distribution from a retirement account and chooses to keep the funds instead of rolling them over into another retirement account, they may be subject to income taxes and an early withdrawal penalty. It is important to work with a financial professional and a divorce attorney to ensure that the division of retirement accounts is done in a way that minimizes tax consequences.

Contact a Collin County Divorce Attorney

If you have decided to divorce, contact a McKinney, TX divorce lawyer to ensure that your rights are protected and you get your fair share of the marital estate. Call The Ramage Law Group at 972-562-9890 to schedule a confidential consultation.

Source:

https://www.annuityexpertadvice.com/withdraw-money-from-retirement-accounts/

https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans