Divorce and pitfalls in dividing retirement accounts

Texas couples who are getting a divorce and who need to split a 401(k) or another type of pension plan will need a court order called a qualified domestic relations order. This document, which should be prepared by an attorney and must be approved by the plan administrator, is necessary for making a distribution from these types of accounts without having to pay taxes or penalties.

If the retirement account is an IRA, there are also regulations that need to be followed, but they are less complicated. Banks or other financial institutions may have their own paperwork requirements, but as long as the assets are rolled into another IRA, the person will not be taxed.

The distribution from a 401(k) or other pension can also be rolled into an IRA. However, if a person chooses to take a direct distribution, they will only pay regular income tax on it. The QDRO should specify if the distribution will be rolled into an IRA.

People who expect to receive a distribution from a spouse's retirement account should not sign paperwork allowing the spouse to change the beneficiary until after the divorce has been finalized. Doing so means that if the spouse does die before the divorce is finalized, the other person might not receive any of the retirement account.

Dividing a retirement account may not be the only financial issue a couple has to deal with in a divorce. One person might be required to pay spousal support to the other. There might be a home or even a business to divide, and in Texas, a community property state, most assets will be considered shared property if they were acquired after the marriage. A couple may want to consider using an alternative dispute resolution method to negotiate a divorce agreement instead of going to court.

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