In a community property state, such as Texas, all marital assets are split 50/50 at the time of the divorce. While many people think they understand what this means, most don't consider some very important aspects of marital law that can affect their retirement in a potentially major way.
When major purchases were made with money earned during the marriage, such as the family home or motor vehicles, it makes sense that these items will be divided. However, not everyone considers that the money they earned at their job while they were married is marital property as well. Savings that have been acquired from those earnings, including retirement savings, is also considered marital property. For a couple who is divorcing at an older age, this can have a profound impact on each individual's retirement plan.
Dividing retirement savings
When it comes to dividing retirement savings, the formula determining who gets what isn't as simple as looking at the balance and splitting the account in half. In many cases, part of that balance is marital property, and part is separate property.
For example, if two people were married at age 30, but one had been making contributions to a retirement account since he/she was 23, those contributions that were made for those seven years before the marriage are considered separate property. Contributions made after the marriage are considered marital property.
Qualified Domestic Relations Order
Retirement savings, whether in a 401K, IRA or a company pension often gets divided according to a Qualified Domestic Relations Order (QDRO), which requires court approval regarding the way retirement distributions are calculated.
The court will consider not only the balance of accounts and pension values that were built up before the marriage, but also the various shifts in the market in order to approximate how much of that account can be considered marital property vs. separate property. The court needs to approve a QDRO, and if it does, the person who is receiving the distribution will need to pay any applicable taxes on it. If it isn't approved, the original owner will have to pay those taxes, even if they don't have the money anymore.
Transfer into a rollover IRA vs. other division options
Transferring money from a retirement account into a rollover IRA is a common way to handle the dividing of retirement savings. Creating separate accounts allows each person to separately manage their assets and their investment choices. Some don't necessarily have their spouse collect the full 50 percent from the retirement savings, but instead negotiate with some of the other marital assets to reach an agreement that allows them to keep a larger portion of their retirement savings. For example, if one spouse was given all equity in the home, they may get a smaller share of the retirement savings.
The division of retirement savings varies based on the circumstances. A good family law attorney can help you look at all these factors and determine what to expect after divorce.