Divorcing spouses should know how retirement assets are divided and understand how to avoid common pitfalls during asset division.
Many people who are getting divorced in Texas are prepared to fight for their share of marital property. Unfortunately, a sizable number of these divorcing spouses may overlook their right to retirement assets. In 2014, a survey of over 500 divorced adults found that 31 percent didn't know they might be entitled to the retirement benefits of their spouses. According to Forbes, one in four of the survey respondents expressed regret about failing to know how to properly divide these assets.
These findings show how important it is for divorcing spouses to fully understand the issues that are typically involved in the division of retirement assets. Spouses should be familiar with the relevant laws, the necessary considerations and the common mistakes that people make when splitting up these assets.
Characterization of retirement assets
In Texas, community property consists of the property, other than separate property, acquired by either spouse during marriage. Property possessed by either spouse during or on dissolution of marriage is presumed to be community property. Separate property consists of: (1) property owned or claimed by a spouse before marriage; (2) property acquired by a spouse during marriage by gift, devise, or descent; and (3) recovery for personal injuries sustained by a spouse during marriage, except any recovery for loss of earning capacity during marriage. The degree of proof necessary to establish that property is separate property is clear and convincing evidence. Community property accumulated during the marriage (and during the pendency of the divorce) is subject to a "just and right" division between both spouses upon divorce. Therefore, any retirement assets that spouses accumulate during the marriage are subject to division in the event of divorce. Retirement assets obtained or accumulated by a spouse before marriage established as separate property may not be divided by a court upon divorce.
Process of asset division
Community property may be divided in family law court or by the agreement of both spouses. If a judge is tasked with dividing marital property, he or she may consider various factors to arrive at an equitable division. These variables include (but are not limited to) the age, health and earning capacity of each spouse. On the other hand, spouses who divide property directly may agree to a division of their choosing.
In either case, many retirement assets can only be divided with a legal document called a Qualified Domestic Relations Order, which may contain provisions unique to each employer's retirement plan. A QDRO directs an employer to pay a portion of a pension or 401k plan to the divorced spouse. It is typically necessary for separating spouses to work with a legal representative who specializes in QDROs to ensure that this order is drawn up correctly.
Common property division mistakes
Even when spouses understand their rights and seek the retirement assets that they may be entitled to, unfavorable outcomes are still possible. According to Forbes and The Huffington Post, to receive the best settlement available, spouses should consider the following things before making any agreements about the division of retirement accounts:
- Is giving up retirement assets in exchange for other assets truly a wise choice? Spouses should remember that other assets, such as the family home, might lose value or come with hidden costs.
- Do some retirement assets carry different tax penalties? If so, these liabilities should be factored into the value of each asset. For example, a Roth IRA will ultimately be worth more than a 401k of apparently equal value, since post-retirement withdrawals from Roth IRAs aren't taxed.
Is rolling over the total value of an ex-spouse's retirement account the best option? Spouses have a one-time option of withdrawing funds from these accounts without a tax penalty, which may benefit people who are struggling with divorce expenses.
Most importantly, a spouse needs the guidance of a qualified attorney to ensure that they fully understand their rights during the property division process. Besides offering advice, an attorney is able to assist a spouse in pursuing the full amount of retirement assets that he or she is entitled to.
It's critical for spouses to consider their long-term financial needs and avoid making decisions that are emotional or impulsive. In many cases, the advice of a forensic financial expert, financial planner and/or tax advisor may help a spouse identify the most advantageous options.