Four Things That You Need To Know About Divorce And Retirement In Texas

  1. Even if retirement accounts don’t pay out for several years, they are still subject to division in a Texas divorce.
    In a Texas divorce, the law states that the court shall determine, by just and right division, the rights of both spouses. Retirement accounts include IRA’s, pensions and 401(k)’s, but the court is not advised by statute as to how these assets are supposed to be calculated when divided between the parties. Because it is not specified by statute, Texas courts will look at three things to determine how to calculate the division:

    • How much are the retirement benefits worth?
    • How much of those retirement benefits are considered community property?
    • What percentage should be awarded to each spouse to make sure that there is a just and right division?
  2. There are four types of accounts that are subject to division by a Texas Court.
    Retirement accounts are one of the largest assets in a marriage and are defined by the Court in the following four (4) ways:

    • Defined Contribution – an employee has an employer that matches retirement and the employee makes regular contributions. These are accounts such as a 401(k), thrift savings, employee stock ownership plans or profit sharing
    • Deferred Compensation – an employee is promised by the employer a lump sum or a specified monthly payment after retirement, based on length of employment, earning history and age. These are a type of defined benefit plan or a pension.
    • Employment-specific retirement – These are plans that have a unique tax treatment or are subject to ERISA or other regulations. This usually applies to police officers, teachers or firefighters who are allowed to “opt” out of social security and creates a special pension plan.
    • Military Retirement – these are also subject to certain regulations and tax laws.
  3. Upon Divorce, these benefits are usually divided by Court order and will not subject the spouse to tax penalties once it is divided.
    • Because these benefits are divided by Court order, this normally results in a “roll-over” of the account funds to the recipient’s account. The best thing to do is to contact your financial professional for assistance with this. If you don’t use a financial professional, visit with your financial institution or your attorney to get additional information.
  4. You can keep your retirement benefits if you divorce and exchange other community property assets that are of equal value to your spouse’s share of the retirement.
    • The amount contained in your retirement accounts are valued as of the date of the divorce. The value questions are outlined above, but sometimes can be very daunting for a court to determine because there is no statutory authority. Therefore, if you have complex retirement issues, such as Teacher’s Retirement System or Federal Employees Retirement System, make sure that you consult your financial analyst or attorney to explain the net value to you when you are considering exchanging your community property retirement benefits for an asset of equal value.

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