Handling 401(k) accounts in divorce

On Behalf of | Dec 27, 2019 | Uncategorized |

When couples get divorced in McKinney, Texas, they must contend with dividing their marital assets. One thing that many people may not realize is subject to division in a divorce is a 401(k) account. Depending on the circumstances, people might have to divide their 401(k) accounts and give a portion to their spouses.

Texas is a community property state. This means that when people divorce, all of their marital assets must be divided between them. Marital property includes the contributions that have been made to retirement accounts during the marriage. People who have valid prenuptial agreements might avoid the division of their retirement accounts if the couples have agreed that each spouse will keep his or her own 401(k) balances instead of dividing them. If no agreement exists, the accounts will be subject to property division in the divorce.

People cannot simply withdraw money from their 401(k)s or IRAs to give it to their spouses directly. Instead, they must use a qualified domestic relations order to divide their retirement account balances. This helps the account holders to avoid early withdrawal penalties and taxes on the amounts that go to their former spouses.

A correctly drafted QDRO that is ordered by the court will instruct the plan administrator to take the correct percentage from the 401(k) or IRA for the spouse. The recipient spouse can then roll over these funds to his or her retirement account. While a spouse can choose to withdraw the money, he or she will have to pay taxes and penalties on any amount that is withdrawn before reaching age 59 1/2. People who have retirement accounts and plan to divorce might benefit from consulting with an experienced family law attorney in McKinney, Texas. A lawyer may be able to help them to figure out how to correctly divide the retirement account and draft a QDRO that will help to avoid taxes and penalties.