One reason divorce is so time-consuming, is because the court must divide up marital property. This is an arduous task, since marital property encompasses a whole lot more than what you can see with the naked eye (such as the zeros in your bank account or the house you live in). Indeed, when dividing up marital property, pensions, IRAs, and 401(k)s are all on the chopping block, too.
These accounts can be tricky, though, because—by their very nature—you never know exactly how much they’ll be worth, until you retire. Which begs the head-scratching question: how do you divide the value of a future, unknown worth?
We’re glad you asked.
Here’s how Texas courts go about handling the appreciating value of pensions, IRAs, and 401(k)s during divorce, and what Neal Ashmore can do to help make sure your division is done right.
Retirement Accounts: The Basics
Although there are a few logistical elements that vary, for the most part, pensions, IRAs, and 401(k)s are treated exactly the same way as any other piece of marital property, during divorce.
This means that it doesn’t matter who’s name the account is in, or which spouse’s employer the benefits come through. In fact, the Texas Family Code states this, outright, saying that both spouses have rights to their share of marital retirement money.
But what, exactly, does that mean? And how do you figure out how much your share is?
To figure that out, we turn to Texas common law, which states that in dividing retirement accounts, the court should:
- Determine the value of the account.
- Categorize the value as marital, separate, or both.
- Divide marital property between spouses.
- Resolving the account.
Value, categorize, and divide; aside from that last step (resolution) it should look a lot to you like the same standard procedure that Texas courts follow when dividing up other marital assets.
Here’s a closer look at how they apply to retirement accounts, specifically.
1. Value the Account
In Texas, retirement accounts are determined based on their present worth (not based on what you originally put into it). Present worth is established according to the fair market value on the date of your divorce.
Hence, whatever you have when you get divorced, is what the ensuing calculations will be based off of.
2. Categorize the Account
Once you have the account’s total worth, you will need to categorize how much of it is separate property, and how much is marital. This categorization will depend largely on when the account was started, how much of it appreciated during the marriage, and when the marriage dissolved.
Community property rules state that anything you bring into the marriage is considered separate property, while things that were acquired (or accrued) during marriage are classified as marital property, and belong to both spouses equally.
So, for example, let’s say Spouse A had a retirement account valued at $100,000 (in step one), and the court determined that 25% of the account appreciated before marriage, 50% accumulated during marriage, and 25% accrued after divorce. In dollar amounts, this would break down neatly into:
- $25,000 prior to marriage
- $50,000 during marriage
- $25,000 after marriage
What this means, is that $50,000 of the retirement account would be classified as the separate property of Spouse A (for the time it accrued before marriage [$25,000], and for the time it accrued after [$25,000]).
The other half—the $50,000 that accumulated during marriage—would be classified as the marital property of both Spouse A and Spouse B, and will need to be divided.
3. Divide the Account
Step three requires the court to divide the account’s shared ownership—or, in other words, whatever is deemed marital property.
In our hypothetical example, this refers to the $50,000 that accumulated during the marriage, which belongs to the spouses, equally.
However, keep in mind that just because both spouses own the value equally, does not mean the court will split the baby down the middle and call it good. Instead, the amount will be assessed and divided in consideration with all or your assets, real property, and debt.
Hence, how that $50,000 will ultimately be divided between Spouse A and Spouse B will depend on a great many more factors outside the scope of our limited hypothetical. (For more on that, though, read up on property division, here!)
4. Resolving the Account
The final step in dealing with retirement accounts is to resolve how (and when) each side will get their retirement money. And—before you start lamenting the loss of a good nest egg—the good news is that it doesn’t have to involve penalties.
In reality, there are lots of different ways retirement accounts can be resolved, and couples have some amount of flexibility in choosing a method that meets their needs, which could mean:
- Each spouse keeping their own retirement account, and not bothering with the other’s.
- Giving up other marital assets in exchange for the full share of the retirement account.
- Splitting the retirement account in conjunction with other marital property.
- Creating an IRA, in which one spouse’s share can be rolled into a different account.
- Liquidating the retirement account, and dividing the proceeds.
If you decide to divide the account as part of your community property, then you will also need to file a QDRA. A QDRA outlines the terms of the division, and makes the non-account holding spouse an authorized beneficiary.
For those who choose to wait, the court will likely issue an automatic hold on the account, prohibiting either spouse from withdrawing the funds early. If you are worried about this happening, anyway, you may need to talk to your family law attorney about a Temporary Order.
Retirement Account Attorneys in Texas
If you have more questions about how Pensions, IRAs, and 401(k)s are handled during divorce—and how it might work in your situation—we want to hear from you. Call the experienced Neal Ashmore attorneys at (972) 436-8000, or schedule a consultation online, and let us help you settle your accounts the best way possible.