How do I split a retirement account in my divorce?
Texas residents who are getting divorced when retirement is near should understand the nuances of splitting retirement accounts with their spouses.
As explained by USA Today, while the overall divorce rate in the United States has decreased, the divorce rate among those aged 50 and over has actually increased. Texas residents who get divorced in their 50s or 60s may no longer need to iron out details for child custody or support. However, they frequently have to contend with how to fund their upcoming or at-hand retirements.
According to CNBC, pensions and retirement accounts are among the most commonly disputed items in an American divorce today. In fact, only spousal support is more argued about by divorcing couples. But, just how should couples go about divvying up these very precious assets?
Every retirement account is unique
No two accounts are the same. Some, like Roth IRAs, are funded with pre-tax dollars. Others, like company-sponsored 401K accounts are not taxed until the money is actually taken out. This difference alone can dramatically change the ultimate value of an account to each spouse.
It is therefore important that when choosing which account to split or keep, spouses evaluate the post-tax value to ensure an equal comparison.
Every asset is not the same
Simply because a home may have a certain dollar value associated with it today and a retirement account may have a similar value does not make them worth the same in a divorce property division settlement. Spouses must remember that homes cost money over time while retirement accounts make money. Many spouses, usually wives, are eager to keep their marital homes and may even give up the retirement account in exchange. This may not be a wise idea in the long run.
The QDRO can make a big difference
If a 401K or other ERISA account is to be split in any way between the spouses, a Qualified Domestic Relations Order should be used. The U.S. Department of Labor explains that a QDRO is a legal means of establishing the non-account-owning spouse as an authorized payee on the account. This allows money to be transferred to that account sans taxes or penalties to the spouse who owns the account.
The recipient spouse may be liable for taxes or penalties if the money is not reinvested into another qualifying account. For spouses that are over retirement age and eligible for distributions, different rules may apply.
Talk to a lawyer before making any agreement
With little time left to make up retirement losses, spouses in Texas should always consult with an attorney before making deals in a divorce. Getting the right advice can go a long way toward preventing unnecessary financial losses.