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Dividing retirement funds can be difficult in divorce

On Behalf of | Mar 15, 2018 | Divorce

Many couples in Texas have worked hard all of their lives to establish their retirement accounts. If divorce becomes inevitable, the potential impact to both parties’ financial security and future can be massive. This is one reason why 62 percent of family law attorneys surveyed in 2016 said that retirement accounts were the most difficult issue for their clients to resolve during the divorce negotiation process.

The financial elements of a divorce can already be contentious. When valuable retirement assets are involved, the process only becomes more complicated. It’s important for couples to understand that pension plans, 401(k) funds and other types of retirement investments are usually heavily regulated. Therefore, it is critical to follow the relevant guidelines to avoid significant taxes, penalties and fees.

While the process of achieving a settlement on retirement accounts can be daunting in and of itself, carrying out the agreement can also require some active work. In order to distribute a work-based retirement account, a court order called a qualified domestic relations order is necessary. One such order should be secured for each account to be divided. The QDRO must be specific, laying out the percentage that should be distributed as well as whether it is a cash distribution or a rollover to another retirement fund. A recipient will have to pay taxes on a direct distribution.

Because of the complexity of the tax and financial issues involved in distributing a retirement account, a family law attorney can provide important counsel and representation throughout the process. During the divorce, a lawyer can help a client to protect hard-won assets and make sure they do not waste their funds due to distribution errors.