Division of 401(k)s in a divorce

According to a survey by the American Association of Matrimonial Lawyers in 2016, retirement accounts were the second most common issue divorcing couples fought over, just behind alimony. People in Texas who are getting a divorce and who must divide a retirement account should make sure they understand the complexities involved. Failing to do so could mean paying a significant amount in taxes and penalties or one spouse getting more than a fair share of the account.

With a 401(k) or a pension plan, it is necessary to obtain a document known as a qualified domestic relations order. The QDRO must be approved by the plan administrator, and then a distribution can be made. If the distribution will be rolled into an IRA, which is necessary to avoid a tax for early withdrawal, this should be specified in the QDRO. The terms of the QDRO must be consistent with the divorce agreement.

The beneficiary of the 401(k) should not be changed until the divorce is final in case the spouse who owns the account dies. The amount each person gets should be in percentages instead of dollar amounts since value can fluctuate. Dividing an IRA does not require a QDRO, but it still must be done correctly and rolled into another IRA in order to avoid taxes and penalties.

Since Texas is a community property state, under family law, most assets acquired by either spouse are generally considered to be shared property and are supposed to be divided equally. However, this does not mean that all couples must make a 50/50 split of all their property. For example, in lieu of the complexities and expense involved in creating a QDRO, one person might take different assets instead. However, it is important to ensure those assets have equivalent values once taxes and other expenses are accounted for.

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