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Dividing pensions and retirement accounts in a divorce

The number of divorces involving couples over the age of 50 has soared in Texas and around the country in recent years even though the overall divorce rate has remained fairly stable. Spouses going through a gray divorce often have significant marital estates, and negotiations over how these assets should be divided can become contentious. This is especially true when retirement funds that have taken years or decades to amass are being discussed in states with strict community property laws.

The government encourages workers to save for retirement by offering them tax benefits. When employee retirement plans are divided in a divorce, a Qualified Domestic Relations Order must be used to ensure that benefits provided by the Employee Retirement Income Security Act are not lost. Funds from defined contribution plans like 401(k) accounts can usually be rolled over without incurring any tax consequences. Distributions to former spouses made using a QDRO are rarely penalized even when the recipient is younger than 60 years of age. Funds placed into an IRA account can also be rolled over, and a QDRO is not required to divide them.

Dividing pensions in a divorce can be a complex process because placing a current cash value on future benefits is difficult, and any contributions made before the divorcing couple married are considered separate property. A QDRO can divide the agreed value of a pension plan with a lump-sum payment or require the benefits to be shared when they are paid. In some situations, the court may decide to address this issue at a future date.

Family law attorneys with experience in high net worth Texas divorces may suggest approaching these issues proactively by drafting a fair prenuptial agreement. Attorneys may also recommend consulting with retirement experts, tax accountants and financial planners before making these decisions.

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