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What happens to retirement accounts during a divorce?

When it comes to untangling financial matters during a divorce, retirement accounts can be a significant piece of the puzzle.

Understanding what happens to these accounts is important for those facing this life-changing event.

Community property principle

Texas is a community property state. That means assets acquired during the marriage are generally considered community property and subject to division upon divorce. This includes retirement accounts accumulated by either spouse during the marriage.

Types of retirement accounts

Various types of retirement accounts may be subject to division in a divorce. That includes individual retirement accounts, pensions and 401(k)s, the latter of which 34.6% of working-age Americans had in 2020, and other employer-sponsored retirement plans. Each type of account may have its own rules and regulations governing its division.

Division of retirement accounts

The division of retirement benefits in divorces typically involves determining the community property portion of the accounts. This often requires a thorough examination of the contributions made to the retirement accounts during the marriage compared to contributions made before or after the marriage.

Qualified Domestic Relations Order

To facilitate the division of retirement accounts, the court issues a QDRO. This legal document instructs the plan administrator on how to distribute funds from the account. It ensures that the non-owning spouse receives their share without incurring tax penalties.

Impact of divorce on retirement savings

Divorcing couples must consider the long-term implications of dividing retirement accounts. For the spouse receiving a portion of the retirement benefits, it can provide financial security in the future. However, for the spouse relinquishing a portion of their retirement savings, it may require adjustments to their retirement plans and goals.

While navigating the intricacies of divorce, looking at your entire financial picture is necessary to plan for a stable post-divorce life.