Texas is a community property. As such, all income and assets acquired over the course of a marriage is considered to be equally owned community property of the spouses, unless it is proven to be otherwise. In many cases, community property will include retirement assets. Sometimes, the parties to the divorce will reach a mutual agreement not to divide retirement assets and will instead accept compensation in the form of more easily divided community property. If retirement funds are divided, however, certain formalities must be observed in order to avoid substantial tax penalties. Let’s take a closer look at dividing retirement accounts in a Texas divorce.
Dividing Retirement Accounts in Divorce
Retirement accounts can include pensions, 401ks, or Individual Retirement Accounts (IRAs). They can include deferred compensation accounts and other retirement savings plans. The first determination to be made in the event of a divorce, however, is whether or not retirement accounts are community property, either in whole or in part, or separate property. Separate property will remain under the ownership of that spouse. Community property will be subject to division.
It can get very complicated as it is not uncommon for a retirement account to be partially community and partially marital property. After all, a spouse may have had a retirement account in place before they were married and continued to contribute to that account throughout the course of the marriage. Contributions prior to marriage would likely be considered separate property. Contributions made during the marriage would likely be considered community property. This is true regardless of whose name was on the account or which spouse made the contributions to the account.
If a retirement account is deemed to be community property or at least part of it is deemed to be community property, it will be critical for the account to be valued. The retirement account will be valued as of the date of the divorce at its fair market value as opposed to the actual purchase price of the account. The portion of the account that is considered to be community property will be divided by the court.
Should the court divide certain retirement plans, such as 401ks, there will be other administrative steps that will need to be taken to actually divide the account without being subject to penalties. The spouse who is set to receive a portion of the other spouse’s retirement plan must obtain a Qualified Domestic Relations Order (QDRO) from the court. A 401k plan administrator is not authorized to divide the account unless compelled by the court to divide it and give the spouse their share of the account. The QDRO is the court order that compels the administrator to do this.
Family Law Attorneys
Retirement assets are often among our most significant holdings. Make sure they are properly handled during divorce proceedings. Reach out to the dedicated family law team at Navarrete & Schwartz for assistance. We are proud to serve the residence of Midland, Texas. Contact us today.