Can a Divorce Affect My Retirement Funds?
Divorce is hard on the finances. How will it affect your retirement? Read on to learn what to expect.
Divorce is a complex process. A lot of the process involves property division, and the laws vary depending on the state.
Texas is a community property state, which means that all marital assets (property “acquired” during the marriage) belong to both spouses and are split in a divorce. The split must be done in a fair way, and is often done 50/50, but some other split may apply depending on the circumstances, such as health, education, earning power, and child custody.
What can be frustrating for divorcing Texas couples, though, is that even retirement accounts are split in a divorce, so they will be affected. You saved up this money for many years, only to have your ex take half of it. This may be one of your biggest assets, so splitting it will be upsetting. Plus, splitting up a retirement account is not an easy task. There are often early withdrawal penalties that apply, as well as hefty tax consequences.
Splitting Your Retirement Account
Let’s say that you have $100,000 in a 401(k). Does that mean you have to liquidate $50,000 from your retirement account? Not necessarily. If you can offer your spouse marital assets of similar value, then you will not have to bust into your retirement account. For example, perhaps you can offer a vehicle, home, or more money. This would allow you to keep more of, or perhaps even everything, in your retirement account.
However, if you do not have anything else to offer, then you will likely need to give up a portion of your 401(k) or other retirement. This is usually done via a qualified domestic relations order (QDRO), which is a court order that gives your spouse the right to a portion of your retirement account. Usually, you split your 401(k) into two new accounts.
Alternatively, you could choose to withdraw the money directly from your 401(k) to pay your ex-spouse. If you are younger than 59½, there will be a penalty involved. Plus, there will be tax consequences. However, you can have your spouse pay the taxes and fees by stipulating it in your divorce agreement.
Some Things to Keep in Mind
Keep in mind that only marital assets are split, so whatever you contributed to your retirement account before the marriage is not subject to split in a divorce – as long as you can “prove” it. Also, you may not have to split your retirement account in a divorce if your spouse also has a 401(k), IRA, or other account that has a similar amount in it. It would not make sense to split the accounts in this case, so the judge will most likely allow you to keep your own accounts.
Contact a Pearland TX Divorce Lawyer
Texas is a community property state, which means everything you own is subject to a 50/50 split in a divorce. Your 401(k), IRA, and pensions may be at risk, so figure out how to protect them so that they do not get depleted by your ex and taxes.
Contact John Powell III, P.C. for help with asset division in a divorce. We will help you keep conflict minimal. Fill out the online form to schedule a consultation.