Handling retirement accounts during a divorce

On Behalf of | Apr 21, 2021 | Divorce |

Although Texas is a community property state, the law only requires that judges divide property in a “just and right” manner, which does not necessarily mean equal. Tangible property such as real estate, jewelry and automobiles may be easily valued and distributed. However, splitting retirement accounts can be time-consuming and complex. If not done correctly, you could take a significant tax hit.

According to the IRS, a Qualified Domestic Relations Order is a legal judgment or decree used for a retirement account. It confirms that you and your spouse each have the right to a portion of the money.

Distribution options

The QDRO is separate from the divorce decree, and you may need a separate order for each employer-sponsored plan or pension account. That paperwork must detail the percentage or dollar amount that the receiving spouse gets.

The spouse who receives a 401(k) or pension distribution may choose to defer the distribution until the account owner’s retirement and take regular payments or a lump sum. Another option is a direct transfer into their own retirement account. Although cashing out is a third option, the fees and taxes that result may be significant.

Equitable vs. equal

If you and your spouse can agree on the splitting of accounts, the court can simply approve of the arrangement. However, if your case goes to a judge, the court has the decision-making power. Factors that affect the court’s distribution of funds include:

  • Marriage length
  • Each spouse’s financial situation
  • Income potential

The disparity of earning power, education of each spouse and personal health may also affect the court’s decision. If you have minor children, the custody situation may also weigh in on what the judge deems “equitable.”

Not all retirement accounts require a QDRO. Splitting traditional IRAs and Roth accounts are often more straightforward. Understanding your options early in the divorce process can help smooth the transition and make the best decision for your circumstances.