How Will Retirement Accounts Be Divided in My Texas Divorce?

 Posted on May 27, 2022 in Complex Divorce

There are many issues that a couple may have to come to an agreement on when they decide to end their marriage. One major issue is the division of assets and property. Texas is a community property state – meaning that the martial estate is owned by both spouses equally and the court divides it in a 50/50 share. Although this division is fairly cut and dry when it comes to bank accounts, that division can and often does get more complicated the more assets the couple owns. Assets such as real estate, collections, and even retirement accounts all must be divided equally. But the majority of retirement accounts have stringent rules when it comes to withdrawals, involving possible penalties and tax implications. This is why it is critical to have a skilled complex divorce attorney advocating for you.

Dividing Accounts with QDRO

Under federal law, a person is not allowed to withdraw from their retirement accounts while they are still employed. Exceptions include taking a loan against the funds or showing hardship. If the person leaves their employer, they can either leave the funds in the former employer’s plan, roll the funds into their new employer’s plan, roll it into an individual retirement account (IRA), or cash out.

Divorce and division of assets is another exception. Even though the account is in one spouse’s name, the court considers it jointly owned by both spouses. In some divorces, there may be enough total asset value that the account’s owner is able to keep the account intact and their spouse gets certain assets that equal the value of the account.

However, in many divorces, this just cannot be done, and the spouse is awarded a share of the retirement account. In order to satisfy the legal requirements, the court will order a Qualified Domestic Relations Order (QDRO) be issued. This order informs the retirement plan manager that the spouse is entitled to a portion of the account funds.

Implications of Early Withdrawal

If you are the spouse who will be receiving the funds, it is important to understand the financial implications, especially if you are not planning on rolling the funds over into your own plan or into an IRA. Although the QDRO protects you from paying a 10 percent early withdrawal fee, you could still face a mandatory withholding tax. For example, some people decide to use the funds to purchase a new home, especially if they did not get the marital home in the divorce settlement, and although this is allowed, it would qualify for the mandatory withholding tax.

These are issues and decision that a skilled high asset divorce attorney can guide you through.

Contact a Travis County Divorce Lawyer

If you have decided to end your marriage, it is important to have a seasoned  Austin, TX complex divorce attorney looking out for your best interests. Call Powers and Kerr, PLLC at 512-610-6199 to schedule a free and confidential consultation.

Sources:

https://www.investopedia.com/ask/answers/qdro-divorce-new-home/

https://www.investopedia.com/terms/q/qdro.asp