When considering a divorce, you may be wondering what will happen to the Individual Retirement Accounts (IRAs), 401(k) plans, or pension plans that are in your name or your partner’s name. While the division of these assets can be a complicated affair, the Katy asset division lawyers of Adams Law Firm have the knowledge and experience to help you navigate through these challenging processes. We’ll work hard to deliver a fair outcome for you.
Reaching a point of agreement and clarity in the division of your retirement assets requires careful attention from the beginning so that legal proceedings don’t drag out longer than necessary. State and federal laws regulate the division of retirement accounts. A thorough understanding of these laws will help prevent disputes further down the line.
At Adams Law Firm, we realize that divorces can cause a lot of stress and pain, and we are here to fight for your rights and for what is yours. With us on your side, you’ll have the guidance of an experienced legal team to help you understand your best options at each point along the way. We’ll help you create a plan that will help free you from worrying about how your divorce will affect your retirement plans.
Call us today at (281) 391-9237 to consult with one of our team and discuss your options.
Are Retirement Accounts Community Property?
According to Texas law, all income that you or your spouse earned during the time you have been married is considered community property. This means that both of you own these assets equally, regardless of which spouse earned the money in the first place. That includes any money that you or your spouse put into:
- Other retirement accounts
While bank accounts and real estate can be held jointly, IRAs, 401(k)s, and pensions can only have one person’s name attached to them. If one or both spouses had these types of retirement accounts before the marriage began, any money the accounts held up until that point is considered separate property.
Nevertheless, determining exactly what portions of these accounts constitute separate and community property is a complicated matter because it involves factors like interest and fluctuations in value. There are disagreements about the existing formulas for determining interest and the amount to be divided. Our Katy asset division lawyers can provide invaluable assistance when it comes to these complicated matters
Dividing Pensions and 401(k)s
Sometimes, separating spouses decide not to divide retirement accounts, choosing instead to divide the value of the retirement funds they owe to each other via assets that are more easily divisible. Assume, for example, that you have an employer-based 401(k) account that has accumulated $10,000 during your marriage. If you and your spouse purchased a car that is currently valued at $10,000, you might choose to exchange your share of the car ($5,000) for your spouse’s share of the 401(k) account ($5,000).
However, if you do decide to divide your retirement assets, it’s important to be aware that there are strict rules to follow so that you don’t incur considerable tax penalties. Because 401(k)s and pensions are provided by private employers, they are subject to a federal law called the Employee Retirement Income Savings Act (ERISA). This law allows spouses to divide some retirement assets while avoiding the tax penalties.
In order to divide retirement plans subject to ERISA, you need a Qualified Domestic Relations Order (QDRO). This is an order that the court issues to outline how to distribute assets from retirement accounts in a divorce. A QDRO is separate from the divorce decree. It is subject to state and federal laws, in addition to the retirement plan’s specific requirements. If the court issues a QDRO, it is then subject to the plan administrator’s review and approval. If approved, the recipient of the plan’s assets has two options:
- Roll the assets over into an IRA (no tax implications)
- Receive a distribution of the funds (usually subject to income tax)
Rolling over the assets into an IRA may seem like the obvious option for many people. However, there may be situations in which the recipient can take advantage of a one-time option of withdrawing funds without incurring a tax penalty. This could be particularly advantageous for a spouse who is struggling with divorce expenses.
ERISA does not cover IRAs, so parties need to approach them differently. A person can transfer funds in an IRA to their former spouse without incurring tax penalties, but this is only possible if the divorce decree or settlement agreement explicitly provides for the transfer. The decree or settlement agreement should clearly indicate the amount to be transferred, and the former spouse who is to receive the funds must establish a new IRA account.
When the IRA’s administrator receives the decree, they will distribute the funds as directed into the new account. Because the distribution is considered a transfer incident to divorce, neither spouse will incur any tax penalty from the transaction.
It is important, however, to follow these steps carefully. If you divide an IRA in another way, the spouse who is the holder of the original account will face tax penalties.
Consult an Experienced Divorce Lawyer in the Katy Area
Going through the stress of a separation is hard enough without the added anxiety of what it means for your retirement plans.
As is the case with other assets and property, you have a right to a fair share of the retirement benefits earned during your marriage. If there are retirement accounts involved in your marital estates, knowledgeable attorneys can provide professional advice on how to evaluate IRAs, 401(k)s, and pensions correctly. The team at Adams Law Firm has been providing valuable assistance and legal representation to our divorce clients for 35 years. We have extensive experience assisting people with the assessment of their retirement accounts and can help ensure that you receive an equitable proportion of these funds.
Give us a call at (281) 391-9237 for a consultation or contact us online.