Divorce and Retirement Accounts
Divorce carries the potential for profound life-altering effects, especially concerning finances and retirement preparations. Saving diligently and aiming for a secure future becomes a priority as you envision a comfortable life ahead. However, life’s twists and turns can be unpredictable, and the person you once imagined spending your golden years with might not be by your side throughout the journey. Nevertheless, regardless of the circumstances that lead to the end of a relationship, it becomes essential to prioritize self-care and safeguard your future.
In the context of divorce in Texas, having a comprehensive understanding of how retirement plans are divided becomes paramount to securing a just and equitable settlement, especially if you’re divorcing close to retirement age. Navigating the intricate process of retirement plan division necessitates careful adherence to legal guidelines and seeking expert advice. Whether you are considering a divorce or currently going through one, being well-informed empowers you to make informed choices and protect your assets for a secure retirement future.
Community Property: Does it include retirement accounts?
The short answer is YES. In Texas, community property comprises all property acquired by either spouse during the marriage, excluding separate property. Any property held by either spouse during the marriage or at the time of divorce is presumed to be community property. It is important to note that just because an asset is titled in only one party’s name, it will still be community property if it was acquired during the marriage.
Separate property includes:
- Property owned or claimed by a spouse before marriage
- Property acquired during marriage through gifts, inheritance, or by will
- Compensation for personal injuries sustained by a spouse during marriage, except for any compensation for lost earning capacity during marriage.
However, you cannot just claim separate property for the asset to be excluded from the community property estate. You need to have clear and convincing evidence supporting your separate property claim. For financial accounts, including retirement accounts, this often means that an expert such as a forensic CPA will need to be retained to trace the assets held within that account. Property that is proven by clear and convincing evidence to be separate property will be confirmed as such in the Decree, and a court cannot divest a party of his or her separate property. However, if a party fails to meet this burden, then the property will be treated as community property and will be subject to a “just and right” division between both spouses.
If you were working before you got married, and you had contributions to a retirement account, you may have a valid separate property claim with regards to the portion of that account that you earned prior to marriage. Do everything you can to download and secure the statements from the retirement account(s) through the current date. That can be tricky, especially if you rolled over your retirement assets into an IRA or other retirement vehicle.
What are the different types of retirement accounts, and how does that impact how they get divided?
There are several different types of retirement accounts, each with its own rules and considerations for division. The purpose of this article is to provide a general overview of some of the more common types of retirement accounts – but know that this list is not exhaustive:
- 401k Plans, 457 Plans, 403(b) Plans: These types of plans are known as an employer-sponsored Defined Contribution retirement plan. Contributions are typically made by both the employee and the employer, and the vested balance of the account is the typically the value of the asset. In a divorce, the non-employee spouse may be entitled to a portion of the Defined Contribution plan accrued during the marriage. This type of plan can be divided without incurring early withdrawal penalties through a Qualified Domestic Relations Order (QDRO). Also, it may be possible for a non-employee spouse to withdraw funds from the 401(k) without penalty when the withdrawal is incident to a divorce (though the non-employee spouse will still be taxed on funds withdrawn).
- Individual Retirement Accounts (IRAs): IRAs are retirement accounts are commonly funded by individuals in addition to or instead of an employer sponsored retirement account. Also, when someone with a 401(k) leaves their employer, they may elect to roll over their retirement funds into an IRA so they have more flexibility and control. IRAs can be divided by a court order, whether the order is agreed or determined by court ruling. Usually, a separate order is not required to divide an IRA, and the funds can be transferred to the spouse’s IRA without penalty or taxes. It is important to note that different types of IRAs have different tax features, so for example, with a Roth IRA the taxes have already been paid and will not be taxed upon withdrawal.
- Pension Plans/Defined Benefit Plans: Pensions are retirement plans that provide a fixed monthly payment upon retirement, usually based on salary and years of service. We commonly see such plans with individuals who have worked for the government (e.g., teachers, police, fire, officials, civil servants, military). Like 401(k) plans, the non-employee spouse may be entitled to a portion of the pension benefits earned during the marriage. The community property portion of the plan is determined using a formula based on the portion of benefit earned during the marriage. A QDRO or specialized Order is typically required to divide these types of plans. It’s important to consider survivor benefits, and other benefits that may be divisible (e.g., Costs of Living Adjustments) when determining the division of the benefit.
While individuals often consider their retirement accounts (e.g, 403(b), 401(k)) as belonging to them since they earned it, it’s essential to recognize that if the contributions were made during the marriage, the account is not exclusively “yours.” Rather, in Texas it is deemed to be community property, and both spouses have a rightful claim to it in the event of a divorce.
In a divorce, retirement accounts like IRAs, 401Ks, and pensions differ from bank accounts or real estate since they can only have one account holder. Despite this, any money contributed to these accounts during the marriage is considered community property, regardless of which spouse earned it. It is common for one or both spouses to have retirement accounts that predate the marriage, in which case, the funds deposited before marriage can be considered separate property if the existence of those funds can be traced.
Making Smart Decisions when It Comes to Retirement Assets
When dividing retirement accounts in a Texas divorce, it’s essential to keep the following points in mind:
- Texas is a community property state, which generally means that the assets acquired during the marriage, including retirement assets, are subject to division in a divorce;
- The division of retirement accounts should be done equitably, not necessarily equally, taking into consideration each spouse’s financial situation, the need to access liquidity, the tax consequences of the asset;
- It is smart to work with a financial advisor who can help you better understand the tax implications associated with the various types of retirement accounts in your estate; and
- Having a knowledgeable divorce lawyer by your side to make sure the deal you negotiate is the deal you get is critical.
- Divorce is not just an emotional transition but also a financial transition.
Our attorneys and staff have one mission: helping you overcome this difficult moment so you can find your footing after. If you’re looking to take the next step, give our team a call.
