If you are considering the prospect of divorce in your later years, one big concern you might have is how a potential divorce may impact your retirement. After working your whole life to save and invest in your retirement, you need to know all of the implications that a divorce might have for your retirement funds.
Texas considers retirement accounts to be marital property
There are two kinds of property in a divorce, separate and community property. Community property is considered to belong to both spouses and is what they have either earned during the course of the marriage or contributed towards the marriage from the separate property they had before getting married. Retirement accounts are normally considered community property of the marriage and thus both spouses have a claim to the funds.
Because these funds are jointly owned by both spouses, the spouse who did not contribute to the funds has the right to a portion of the funds when the community property is being distributed during your divorce. This can be accomplished in one of two ways. The easiest method is a cash-out for one of the spouses from the retirement funds, while the more involved method is called a qualified domestic relations order.
Cashing out a retirement fund
The simplest way that a retirement fund is divided during a divorce is through a direct cash-out to the noncontributing spouse. This provides them with a one-time lump sum payment from the retirement funds. In return, they will no longer have a claim over the remaining retirement funds. This distribution of funds from the retirement account can have tax implications and penalties associated with the early withdrawal of retirement funds from the account.
Obtaining a qualified domestic relations order
The second way that you can divide a retirement account is via a qualified domestic relations order or QDRO. This is a court-obtained order that will divide the retirement fund between the two spouses, giving each a separate retirement fund from the total assets of the original.
The original contributor to the retirement fund essentially continues as they have without much change, and the other spouse, now called an alternate payee, can decide whether they wish to keep the funds in the original retirement plan or move them into another retirement account. As with any retirement fund, early withdrawals may still be subject to taxes and additional penalties.
To minimize these potential penalties, speak with a retirement planner or attorney to help you determine what the right options might be for your retirement accounts.