Why is it difficult to divide retirement accounts between divorcing spouses?
In the internet era, more spouses are turning to do-it-yourself divorce as an affordable means to end a marriage. While some couples may be able to successfully divorce on their own, there are numerous risks if you elect to undergo a DIY divorce. Divorcing spouses may end up with far more significant financial expenses from going it alone than they would have incurred in attorney’s fees for experienced assistance with the divorce. Of particular concern is the division of retirement assets, which could lead to hefty taxes and penalties if not divided properly.
Who Receives the Retirement Funds?
Under Texas law, retirement assets are considered property and are therefore subject to “just and right” division in court. Retirement plans are further treated as indirect compensation to one of the spouses, as it will eventually become income. All contributions made to a retirement plan during the marriage are deemed community property, absent a pre or post-nuptial agreement to the contrary.
Dividing retirement accounts becomes complex if the spouse with the account has not yet retired. Generally, a court will value the retirement plan as of the date of the divorce. Accordingly, the actual value of the retirement benefit will differ from the value divided at the time of the divorce.
Improper division of retirement benefits could leave a deserving spouse with nothing, or may result in one spouse being hit by astronomical taxes and fines. For example, if one spouse withdraws from the account to give the proceeds to the other spouse as a part of a DIY divorce agreement, the funds may be taxed at nearly 40 percent and face an early distribution penalty. With the help of an attorney, these retirement funds could have been divided without penalty through the use of a qualified domestic relations order (QDRO).
Pensions come with the most complex division rules of all retirement accounts. Without a properly executed legal agreement at the time of the divorce, one spouse may not receive any portion of the pension. It is critical that divorcing spouses with retirement accounts consult with a skilled divorce attorney well versed in QDROs and the intricate division of retirement assets as soon as possible.