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Your divorce and the distribution of retirement account funds

On Behalf of | Jun 20, 2022 | blog, Divorce |

Perhaps you and your spouse are ending a long marriage and one of your concerns is the fair division of your retirement accounts knowing that Texas is a community property state.

Different types of retirement plans have different rules about distribution and some rules are more complex than others.

QDRO distributions

A Qualified Domestic Relations Order (QDRO) is a legal document used for the division of 401(k), pension or other employer-sponsored retirement plans. The QDRO ensures that distribution is fair to the parties dividing the funds. Multiple types of plans require a separate QDRO for each. A QDRO ensures that no tax consequences result from taking early distribution of funds.

Beneficiary updates

There are various ways for you to accept retirement fund distributions as a result of the divorce. You can request a direct transfer, which allows you to roll the funds into your own retirement account. You can also defer receipt of an employee retirement account distribution until the owner of the account retires. Another option is simply to cash out your share of the funds. No matter which option you decide on, remember to update your beneficiaries since you will probably not want your soon-to-be-ex to be a member of that group.

Tax consequences

Different tax consequences apply to different kinds of retirement accounts. For example, you contribute pre-tax to a 401(k) or a traditional IRA. However, you only contribute to a Roth IRA once you pay income tax. You must keep in mind that certain retirement accounts come with tax implications when the time comes for you and your spouse to divide these funds.