Understanding how Texas divorce impacts retirement accounts

On Behalf of | Sep 25, 2017 | Blog

There are certain issues that typically become the biggest problems in a divorce. One of them is often child custody and support. Another is the division of your property and debts.

In general, divorcing couples want to know that they will get a fair share of assets and a fair division of household debt. This can lead to a lot of fighting, especially if you don’t agree with your spouse about what is fair or reasonable for the division of your assets and debts.

When both partners are interested in an asset, it can result in a protracted and contentious divorce. Many times, the home or primary residence is the most hotly contested asset.

Another important asset too often treated like an afterthought is your retirement account. Understanding how Texas approaches asset division can help you understand what will happen to your retirement funds in a divorce.

Most accounts are marital, not individual, assets

Unless you and your spouse executed a legally sound prenuptial agreement before marrying, chances are that all of your assets acquired during the marriage will get divided by the courts.

Because any assets earned during the marriage are marital property, it doesn’t matter if only you or your spouse have your name on the account. It also doesn’t matter if only one of you every deposited money into the account.

If the deposits occurred during your marriage, those funds were marital funds and subject to division. Deposits from before the marriage may get excluded from division, but interest they accrue may not.

The courts will look at the full amount of deposits and interest from during your marriage when deciding how to fairly divide your assets. Chances are, you will split the account or the value of it will get deducted from other assets, like home equity.

The law allows for penalty-free division

Whether you have a Roth IRA or a 401K, you probably know about taxes and penalties for early withdrawals. You may worry about the potential tax implications if you have to split the account as part of your divorce decree. Thankfully, because divorce is so common, there are already processes in place to protect you from tax obligations and other financial penalties.

When the courts order the division of a retirement account due to divorce, you can have the account divided with a Qualified Domestic Relations Order (QDRO).

The QDRO gets submitted to the plan manager, who will then divide the account, which is typically ordered as a percentage rather than a specific amount, and send funds into a new account for you or your spouse. If done properly and as the result of a court order, you won’t incur any penalties or fees.