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How to avoid penalties in dividing retirement accounts

When Texas couples get a divorce, they will likely need to divide their marital property. There are procedures that must be followed in dividing retirement accounts to avoid incurring taxes and penalties.

For 401(k) and workplace pension accounts, a document called a qualified domestic relations order must be prepared. This document must specify how the distributions will be received and should be consistent with the terms of the divorce agreement. Some people prefer to take a 401(k) distribution directly instead of rolling it over into an IRA. Divorce is an exception that will allow a person to do this without being penalized although there will be taxes on the distribution. A QDRO is not needed to split IRAs, but financial institutions generally have their own paperwork and procedures that must be followed to avoid taxes and penalties.

There are other precautions people should also be aware of regarding retirement accounts and divorce. A spouse should wait until after the divorce is final before agreeing to be removed as beneficiary on a 401(k). This ensures that spouse will receive the money if the other spouse dies before the divorce has been finalized. Another consideration is that an IRA may be vulnerable to creditors in a bankruptcy while 401(k) assets are not.

There are so many potential complications around these types of accounts that people may want to consult a financial professional in addition to an attorney. The attorney may be able to assist the person in negotiations with the spouse over property division. Most of the property acquired since marriage by either spouse will be considered shared property, but spouses do not have to split all their retirement accounts equally. It might be easier for one to keep the account and the other to keep an asset of similar value.

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