Dividing retirement accounts could cause major financial strains for divorcing couples that are close to the end of their careers. If you were counting on keeping your entire retirement account after a divorce, the law says otherwise. Because Texas is a community property state, assets that are community property are divided between the spouses. Community property laws usually require the property to be split evenly. However, the nuts and bolts of the community property rules can be far more complex than they may first seem.
Retirement Accounts and Pensions Are Subject to Division
Community property includes assets that are invested in retirement accounts if they are earned during the marriage. You may think you can keep your retirement account assets if you are not currently drawing from them, but under Texas law, they are investments that are part of the communal property. It does not matter that you earned all of these assets on your own during the marriage. Community property rules make them subject to division. There are very few exceptions to community property rules, and you will need convincing evidence to override the presumption.
Community property may also include pension payments. These are also subject to division even though you may not receive those payments until years down the road. The vested part of your pension is part of the community property, and the usual rules of division will apply.
Many people assume community property will be split right down the middle during a divorce. While this can be a common result, courts must order a settlement that is just and fair. Going into the divorce, an even split of retirement assets is possible, but it is not the only potential outcome.
The Actual Calculation of Community Property Can Be Challenging
When it comes to the division of retirement benefits, things can become challenging when you get married after you have already started a retirement account. Some money in your account was earned before the marriage, while the rest was earned during the course of the union. The difficulty is in figuring out what is separate property and what must be divided between the two spouses. In some cases, the separate property and community property can become so hopelessly intertwined that it is hard to extricate one from the other.
Usually, the increase in value of the separate property in a retirement account during the marriage would be considered community property. By way of illustration, assume that you had $10,000 in a retirement account at the time of marriage. You contributed $50,000 to it during the marriage. By the time of divorce, the account is worth $100,000. The total amount subject to division between the spouses is $90,000.
Splitting accounts can get complicated in a divorce. This is even more true if you are dealing with a large amount of property. You may end up dealing with forensic accountants to determine what assets can be attributed to whom. If you want to keep as much of your retirement account as possible, your lawyer will need to present compelling evidence that the account is separate property. This will likely require the use of experts and quite a bit of litigation.
In addition, there are also challenges when separate property and community property are commingled. When this is the case, complex accounting measures will also need to be employed to figure out what is separate and what is subject to division. Even though the property division rules seem relatively simple, figuring out what is actually community property can be difficult.
The Actual Division of the Account Can Also Be Difficult
While there is a presumption of a 50/50 split of community property, the actual mechanics of property division in divorce can be difficult. Retirement accounts can only have one legal owner. Each spouse may have their own account with different balances. In order to divide the accounts, you would need to transfer money between the two accounts. This involves a Qualified Domestic Relations Order (QDRO) that needs to be filed in family court. The QDRO must be technically precise and contain specific wording in order to be legally binding and effective.
If you have IRA accounts, you would not use a QDRO. Instead, you would need to do a direct rollover between the two accounts. This is something that you would need to think about when you negotiate a divorce agreement.
A Prenuptial Agreement Can Make Things Easier
One way to avoid all of this hassle is to sign a prenuptial agreement. It could clearly specify what property is considered to be separate property. You have the ability to define this term on your own through an agreement with the other spouse. A prenuptial agreement could address retirement accounts and how they are handled in a divorce. Otherwise, you risk losing your hard-earned retirement savings in a divorce. If the prenuptial agreement is valid and enforceable, it will save you quite a bit of trouble and risk in the future.
Remember the Tax Implications of Account Division
Another factor that you must consider is taxes. Make sure you understand the tax treatment of dividing a retirement account. Otherwise, you could find yourself facing a large tax bill at an inopportune time. Cashing in certain retirement assets could lead to federal tax bills as well as an early withdrawal penalty. The way you divide a retirement account could determine whether there is a tax bill, so you should seek legal advice and speak to a CPA about the tax implications of doing so before you take action.
To schedule a consultation, contact us today. Our Brazoria County, Texas family law attorneys are ready to help.