When going through a divorce in Texas, it is important to properly divide retirement accounts. To split a 401(k) or similar account, a qualified domestic relations order (QDRO) will need to be drafted. The order will then be approved by a judge and reviewed by a plan administrator before the money can be transferred out of the account. Usually, only contributions and appreciation that occurs after the marriage begins is split in a divorce.
It is important to have the QDRO because it will not trigger a taxable event in the eyes of the IRS. The money can be transferred directly to an IRA, and the person receiving the cash would not have to pay any taxes or penalties.
However, if the money is taken out of the IRA prior to age 59.5, that person would pay an early withdrawal penalty. Those who need to split a 401(k) as part of a divorce are advised to seek the advice of an attorney who has experience drafting QDROs. It may also be a good idea to speak with a financial adviser who can help structure the transfer.
Spouses who accumulated retirement assets during a marriage must generally split them in a divorce. In community property states, these accounts are divided equally between the two spouses. However, it may still be beneficial to seek legal advice prior to the separation. By minimizing taxes or other fees, there can be more in the account available to compound over several years or decades. This may allow individuals to build a stronger financial future after a divorce.