Dividing his and hers property is not a simple task. There are a lot of moving parts to this beast, and even if you aren’t engaged in a high net divorce, the average couple still produces enough marital property to make a head spin.
One of these complex cogs is the existence of retirement accounts. Since these funds aren’t typically distributed until years down the road, clients often worry how they can be sure they’ll receive their fair cut of the pie, when it’s so far off.
Luckily, it’s not as hard as it seems, and by filing the right documents, you won’t have to worry about losing interest in a retirement account down the road.
Retirement Benefits and Divorce
Most of you already know how a retirement account works: your employer takes money out of your paycheck each month (tax free), and deposits into a proverbial piggy bank. These funds then build up over time, leaving you a nice little nest egg to draw on, once you reach retirement age (usually around age 60).
There are a lot of different types of retirement benefits out there, including:
- Deferred compensation accounts;
- 401ks; and,
- Individual retirement accounts (IRAs).
However, they all serve essentially the same purpose, which is: to save money that you’ll be able to spend in your old age, once you retire from the workforce.
The thing is, in order to encourage you not to spend it, most retirement accounts will slap a penalty on you, if you try to withdraw funds early. Which is all well and good for savings, but where does it leave you, if you end up getting divorced before the big six-oh? Are retirement funds considered community property? Or are they exempt?
Yes, Retirement Accounts are Considered Community Property
If you were hoping to keep the entire contents of your retirement account, post-divorce, we hate to break it to you, but you’re out of luck. Retirement accounts are considered marital property, and, as a result, are subject to division, upon divorce.
(And yes, this is true, even though yours is the only name on the account.)
Texas is a community property state, which means that anything acquired during the marriage by either party—be it money, debt, or property—belongs to both spouses equally, regardless of whose name is on the paycheck, lien, card, or mortgage. If one of you acquired it after “I do,” then the obligation or asset belongs to both—retirement accounts not excluded.
The only exclusions to this would be for contributions made before and after marriage (which would be considered “separate,” not “community” property). All funds deposited during marriage, however, would be on the chopping block.
How to Divide Retirement Account Benefits
The way you divide up retirement benefits really depends on what you and your spouse want to do. You could:
- Take the penalty, and divide the proceeds now;
- “Cash out” your share of the account’s value for other marital property;
- Keep your own individual accounts, and give up rights to your spouse’s (which really only works if you both have benefits of equal value); or,
- File a QDRO, which will give you a legal claim to your share of future payouts.
Qualified Domestic Relations Order
A Qualified Domestic Relations Order (or, “QDRO”) is a document you file with a retirement provider, post-divorce, which essentially grants the non-account-holding spouse legal authority to claim their portion of retirement funds, once they’re distributed.
The Texas Family Code doesn’t specifically require you to file this, in order to receive your share of benefits. However, a QDRO is almost always the preferred method of dealing with retirement benefits, because it gives the non-account-holding spouse:
- The same legal authority and powers as the original account holder; and,
- Allows them to receive direct payments from a provider (instead of having to deal with a cantankerous ex).
This legal authority has a lot of perks, including—among other things—the ability to access funds, even if, say, your ex decides to work past the age of retirement.
Who is Responsible for Filing the QDRO?
The alternate payee (that is, the non-account-holding spouse) has the responsibility to draft and submit a DRO—or, “domestic relations order”—for your judge to sign. A DRO outlines the terms of your division, and should include all relevant account, payor, and payee information.
Once your DRO has met the requisite qualifications, it becomes a “qualified” DRO, or QDRO.
What Should My DRO Include?
At a minimum, your DRO should identify:
- The name and address of the account holder;
- The name and address of the alternate payee;
- The payment terms (i.e. the terms you agreed upon during divorce);
- The applicable time period (i.e. the dates you were married); and,
- The dollar amount or percentage that the alternate payee is entitled to.
If you’ve retained representation, your trusty family law attorney will make sure all these points are addressed, and submit this document on your behalf.
Does a QDRO Cost Money?
Yes. In addition to your attorney’s hourly fee, most retirement plans will have a separate transaction fee, which must be paid in order to process your QDRO.
While the amount of this fee varies between plans and firms, it’s not unheard of for it to reach upwards of $1,200. (Yeah. It’s a doozy.)
Who Pays This Amount?
Most of the time, it’s the alternate payee who fits the bill for all QDRO-related costs. This includes not only the cost of your attorney’s time to draft and submit, but also the QDRO’s transaction fee, and any tax consequences, as well.
Occasionally, you’ll have a plan that splits transaction costs between account holders (as a part of the plan’s regular fees), but most of the time the cost to add another payee ends up being the separate responsibility of the person wanting to add themselves.
Is it Worth it?
Absolutely! While the cost can seem outrageous right now, when compared to how much money you typically make on retirement benefits, it’s nothing. And considering how much money is on the line, this is one transaction you probably don’t want to leave up to your ex-spouse.
On the flip side, a QDRO is beneficial to original account holders, as well. A QDRO helps protect an account holder from liability by making the transfers automatic, and providing easy documentation as to how and when funds were distributed, preventing a sneaky ex from double dipping into your retirement coffers.
QDRO Attorneys in Texas
Whether you are a new payee who needs help drafting a QDRO, or you’re an original account holder who needs an attorney with a sharp eye for review, the Neal Ashmore team can help you with all your QDRO needs.
For more questions about how Texas courts handle retirement accounts during divorce, we want to hear from you. Call the Neal Ashmore team at (972) 436-8000, or schedule a consultation online, and let us help you get the property division you deserve.