Addressing Investment and Retirement Accounts in Divorce

 Posted on May 17, 2023 in QDROs, Pensions and 401(k)s

Many people in the state of Texas remain unaware that their retirement and investment accounts may be subject to division in the event of a divorce. In many divorce cases in Texas, retirement and pension accounts make up a major portion of marital assets, so it is important to understand how these assets may be divided.

Types of Retirement Accounts

There are typically two types of retirement accounts:

Defined Contribution Accounts

Defined contribution accounts are accounts in which a spouse makes a monetary contribution. The benefits of the account are based on the contributions made to the account and any investment returns on the money saved in the account. 401Ks and individual retirement accounts (IRAs) are two types of defined contribution accounts.

If the contributions to the account were made during the marriage, the contributions would be considered community property.

If the account shows an increase in value during the marriage, it will also be community property and will be divided during divorce.

Defined Benefits Accounts

Defined benefit plans involve a pre-set and fixed benefit for the employee during retirement. The benefit can be calculated by considering the spouse’s employment and salary. Pensions are the best example of this kind of account.

If all of the benefits in the account were earned through employment during marriage, the entire account would be subject to equitable division.

Sometimes, the non-employee spouse will receive a lump sum as a payout. In other cases, the non-employee spouse will only get benefits once the employee spouse starts to receive benefits.

When Is an Individual Entitled to Their Spouse’s Retirement or Pension Account?

Since Texas is a community property state, some factors are needed to be considered to determine whether one spouse is entitled to a part of the retirement and pension plan of the other spouse.

One major factor is when the contributions to the accounts were made. If the contributions to the account were made before marriage, the state might consider them separate assets, and they may not be subject to division.

However, if the retirement and pension accounts were credited after marriage, they might be considered community property and must be divided upon divorce, regardless of which spouse owns the account and which one made the deposits.

Most retirement accounts may be subject to division by the court, regardless of the duration of the marriage. In addition, the court does not have any obligation to divide the account evenly between the two spouses. Instead, it will determine a fair and equitable division of assets, depending on the unique situation of the spouses.

What is a Qualified Domestic Relations Order?

A Qualified Domestic Relations Order or QDRO is a judicial order that addresses how specific retirement accounts will be divided. Under the order, the retirement account will be divided tax-free without any penalties.

This means a 401k account can be divided into two separate 401k accounts for each spouse and will not be subject to any penalties or taxes.

Contact Austin Divorce Attorneys at Powers and Kell, PLLC

At Powers and Kerr, PLLC, our Austin divorce attorneys have represented clients in complex and contested divorce cases, including various financial assets and other issues. Call us at 512-610-6199 to schedule an appointment.

Sources:

https://statutes.capitol.texas.gov/Docs/FA/htm/FA.7.htm

https://www.irs.gov/retirement-plans/defined-benefit-plan