When a Texas couple decides to end their marriage, they will have to split their retirement accounts as part of the divorce settlement. The splitting spouses should give careful attention to the details involved in the division and distribution of retirement accounts such as 401(k) plans, pensions and IRAs. Mistakes could result in unexpected tax bills or an ex-spouse receiving an unintended amount of money.
Workplace retirement accounts require the preparation of a qualified domestic relations order during a divorce. This court order will describe who gets how much and whether the funds will be directed to another retirement account or distributed immediately as cash. In many cases, cash distributions will result in income taxes and penalties for the recipient. People splitting IRAs or Roth IRAs do not need to execute a QDRO, but they still should obtain advice about possible taxes.
Financial planners recommend that the documentation that divides retirement assets use percentages to assign distributions instead of fixed amounts. The value of plan assets could fluctuate while a divorce is in process. Therefore, a fixed amount might cease to reflect the percentage that the parties agreed upon earlier.
Retirement accounts frequently represent the largest cash asset held by married couples. For this reason, retirement funds can be a source of conflict when negotiating divorce terms. That’s why a soon-to-be ex may want to seek out legal representation. An attorney could explain how much of the savings a spouse has a right to receive in a divorce. This information could prevent the client from signing an unfair settlement. Additionally, an attorney could handle communications with the other party and strive to broker an agreement that results in an equitable division of marital property.