Dividing IRAs, 401Ks, and Pensions in Divorce

Under Texas law, all income earned during the time a couple is married is deemed community property unless proven otherwise. This includes any money either spouse contributed to an IRA or 401K or earned as pension benefits. When assets are divided in a divorce, it is important to ensure that any retirement funds are properly evaluated and distributed, and that both parties understand the tax implications of any division. Dividing IRAs, 401Ks, and pensions in divorce can be complex. If you are considering dissolving your marriage and you or your spouse have any of these kinds of accounts, it is in your best interest to retain experienced divorce counsel to ensure that any retirement benefits are accurately assessed. The Dallas divorce lawyers at the McClure Law Group will work diligently on your behalf to pursue an equitable share of any retirement benefits or other assets that are community property.

Unlike bank accounts or real estate, IRAs, 401Ks, and pensions can only be in one person’s name. Although retirement accounts can only have one named account holder, any money deposited into an IRA, 401K, or pension during a marriage is considered community property, regardless of which spouse actually earned the money. In many cases, one or both spouses will have retirement accounts that existed prior to the marriage. While any money deposited in a retirement account prior to the marriage is separate property, the process of dividing IRAs, 401Ks, and pensions in divorce (which involves determining what represents separate and community property in each retirement account) is complicated, due to factors such as interest and fluctuation in the value of accounts.

In some cases, the parties will agree not to divide any retirement assets and instead will allocate the value of the retirement funds owed to each party via other more easily divisible assets. If the retirement funds are divided, however, there are strict rules that must be followed to avoid harsh tax penalties. Any retirement plan provided by a private employer, such as a 401K or a pension, is subject to a federal law known as the Employee Retirement Income Savings Act (ERISA). ERISA allows parties to divide certain retirement plans during divorce without incurring tax penalties.

To divide retirement plans that are subject to ERISA, a Qualified Domestic Relations Order, or QDRO, is needed. A QDRO is an order issued by the court that sets forth how retirement plan assets are to be distributed in a divorce. A QDRO is separate from the divorce decree and must comply with both state and federal law and the particular requirements of the retirement plan. Once the QDRO is issued, it will be sent to the plan administrator for review and approval. If the QDRO is approved, the recipient of assets under the QDRO may then choose to roll over the assets into an IRA without any tax implications or take a distribution of the funds, which will be taxed as income.

IRAs are not subject to ERISA and must be divided in a different manner. Funds in an IRA can be transferred to a former spouse without tax penalties, but only if the transfer is explicitly provided for in either a divorce decree or settlement agreement that is incorporated into the decree. The decree or settlement agreement must clearly state the amount of funds to be transferred to the former spouse and be sent to the administrator of the IRA. The spouse receiving the funds must set up a new IRA. Upon receipt of the decree, the administrator will divide the IRA as directed by the decree, and transfer any funds owed the former spouse into the IRA he or she established. This transfer is defined as a transfer incident to divorce, and neither party will be taxed on the transfer. If an IRA is divided in another manner, the spouse who is the account holder will face tax penalties.

You are entitled to an equitable share of any income earned during the course of your marriage, including any retirement benefits. If your marital estate includes retirement benefits you should confer with a knowledgeable attorney to ensure any retirement funds are properly evaluated, as dividing IRAs, 401Ks, and pensions in divorce is a nuanced process. The seasoned lawyers of the McClure Law Group have substantial experience assisting individuals in assessing the nature of retirement funds and obtaining a fair share of any funds they are rightfully owed. We represent individuals in other cities in Dallas, Grayson, Collin, Tarrant, Denton, and Rockwall Counties as well. Set up a consultation by contacting us at 214.692.8200 or via our online form.