4 Important Elements of Dividing Retirement in Divorce
While every divorce is different, many involve the unraveling of complexly intertwined finances. During the course of a marriage, spouses share many, if not all, of their financial assets. Texas law views any income or assets obtained during a marriage as community property owned jointly by both partners. This means it will be subject to property division.
While most people expect that assets like a car or a family home purchased during marriage will need to be divided, few realize that there are other financial assets which are also subject to property division. Chief among these are retirement accounts and similar retirement savings and pensions. In fact, retirement accounts are often the largest asset divorcing spouses have apart from a family home.
To help you understand the important elements of dividing retirement accounts in a Texas divorce, our legal team at Coker, Robb & Cannon, Family Lawyers has put together the following information.
#1: The Type of Retirement Accounts
The type of retirement account, pension, or benefit plan is of crucial importance. Different retirement accounts and plans may have different terms enforced by the plan’s administrator and may be subject to different regulations, tax laws, and other rules. The vast differences and intricacies of different retirement accounts require tailored approaches and careful consideration of unique issues and laws involved.
Common types of retirement accounts divided in divorce include:
- Defined contribution (DC) – A defined contribution (DC) plan is one where an employee, or an employee and an employer who matches retirement, makes contributions on a regular basis. This is the case with a 401(k) a person may have through their work, as well as profit sharing, thrift savings, and employee stock ownership plans
- Deferred compensation – Deferred compensation plans are a type of defined benefit plan, or pension, where employers promise a specified monthly payment during an employee’s retirement, or a lump-sum upon retirement based on an employee’s earning history, length of employment, and age. While less common than defined contribution plans, they are still used by some corporations and by various public entities.
- Employment-specific retirement – Certain professions have highly specific retirement benefits that need to be addressed properly during divorce. These may include pensions, funds, and plans for police officers, teachers, firefighters, and others that may be subject to unique tax treatment, federal ERISA law, and other applicable regulations.
- Military retirement benefits – Military pensions and retirement accounts are also subject to unique rules and laws, including the SCRA, or Service-members Civil Relief Act, that can affect how they are division during divorce. Having an attorney with experience dividing military retirement benefits is critical to effectively navigating the process.
#2: Community & Separate Property
Determining whether a spouse will have a claim to the other’s retirement savings depends on when contributions to the retirement account were made. That’s because Texas is a community property state which classifies any income and asset earned during the marriage as divisible community property. Separate property, on the other hand, is property which was acquired prior to marriage or through an inheritance or gift.
The distinction between community and separate property is an important one in matters of property division, and especially when determining the divisibility of a retirement account. In some cases, retirement accounts can be both separate and community property, as it may have existed prior to marriage and was maintained, meaning a spouse continued to make contributions, using community property income earned during the marriage. As such, it becomes important for divorcing spouses to know:
- What date their retirement account was opened;
- The retirement account’s balance before marriage; and
- The account’s current balance
When a retirement account was opened prior to marriage, it may be possible to preserve a portion of that account as separate property exempt from division. This requires partitioning, division, and approval from the court and the plan’s administrator with the use of a Qualified Domestic Relations Order (QDRO).
#3: The QDRO
A Qualified Domestic Relations Order, or QDRO, is a procedure used by courts to partition and divide retirement accounts. It serves as a court order to the retirement plan’s administrator to divide a retirement account into two separate accounts and permit an alternate payee, which in the case of divorce would be the ex-spouse of the account holder, to receive part or all of the account. QDROs must be drafted carefully with specific considerations about the retirement plan’s guidelines, and it must be pre-approved by the plan’s administrator.
Because QDROs concern a third party (i.e. the plan’s administrator), they are an extra step in the property division process. Divorcing spouses will still need to detail the terms of division in their final divorce agreement. Generally, the QDRO:
- Requires approval from both the court and the plan’s administrator (which is why it is important to draft a QRDO early in the process to avoid potential delays when administrators review it and state that it does not comply with the plan’s terms as is, or when revisions are required by courts or negotiations with disputing spouses).
- Sets the date on which the retirement account will be divided, such as on the date of the divorce, or another date as agreed upon by spouses and approved by the plan’s administrator.
- Sets the amount of money or the percentage of the retirement account to be awarded to each spouse.
- Will determine which spouse will be liable for any loan against the retirement account.
#4: Options for Resolution
While there are certain requirements and conditions to be met under a specific type of retirement account, divorcing spouses still have a considerable amount of control when it comes to how the division of a retirement account will ultimately be resolved. Although your particular situation will influence which options may be available or appropriate for you, there are a few common ways spouses come to agreements that work for them, and which they can both agree upon.
Common options for resolving retirement account division include:
- Keeping retirement accounts – It is not uncommon in cases where spouses who both have retirement accounts, and who may be divorcing on amicable terms or are keen to avoid added complexities in their case, to agree that retirement accounts can be left alone and not divided during their divorce. If one spouse’s retirement account is significantly larger, a potential solution may be to give the other spouse a portion of the larger account.
- Marital assets in exchange for retirement account – This option involves a spouse who keeps all of their retirement account and relinquishes an equivalent or comparable share of their community property assets to the other spouse in lieu of dividing the account. A common example would be giving up their share of the family home to the non-account-holding spouse. Two important points to consider with this option is the future projected value of an account upon retirement, and long-term tax consequences.
- Splitting the retirement account – This requires an accurate evaluation of the community and separate property shares of a spouse’s retirement account, as well as a QDRO that outlines how the community property portion of the account will be divided.
- Creation of an IRA – The retirement account holder may roll the other spouse’s community property share of the account into an IRA under the ex-spouse’s name, provided they meet certain requirements, such as having left a company or being of a certain age.
- Liquidating a portion of the retirement account – A spouse with a retirement account subject to division may have the option to liquidate a portion of the account needed to comply with the terms of property division and the QDRO and make a lump-sum payment to the other spouse. This option requires meeting complex conditions and isn’t as common as other resolution options.
- A pre- or post-nuptial agreement is followed – If spouses have agreed to and signed a prenuptial or postnuptial agreement regarding the division of property and the division of retirement accounts upon divorce, those terms will be followed.
Proven Representation in Divorce & Property Division Matters
Property division is a highly important matter in divorce, and the division of retirement accounts and assets are often among the most challenging and contested aspects of the property division process. Protecting your fair share as you work toward a property division settlement and resolution is a high stakes matter, but it can be done effectively with the support and representation of proven divorce and family law lawyers.
Since 1998, our attorneys at Coker, Robb & Cannon, Family Lawyers have demonstrated a proven ability to apply our experience, resources, and commitment to even the most challenging cases, including those involving a range of retirement assets, high net worth, and other financial complexities. Learn more about dividing retirement in divorce, as well as how our team can walk you through the entire Texas divorce process, by calling or contacting us online. We serve clients across Collin County, Denton County, and the surrounding areas.