If you are going through a divorce, you have a lot to think about. Unfortunately, many people fail to pay enough attention to their retirement plans when in the throes of divorce, and this is often a financial mistake. While thinking about retirement benefits probably seems a bit dull – especially if you are decades from retirement – it is important to recognize the implications if you are moving toward divorce.
Your Retirement Plan
The value in any retirement benefits that you bring into your marriage remains your personal property, but any value that accrues once you are married becomes marital property. Your retirement accounts reflect your wise choices, savvy investments, and financial discipline, and they can become quite substantial over the course of a marriage. If you are still many years from retirement when you divorce, it is easy to lose sight of the value of your retirement plan, which makes it easier to inadvertently lose benefits in your divorce, On the flip side, if your spouse’s retirement has grown considerably over the course of your marriage, it represents marital assets that you are also entitled to in divorce.
Qualified Domestic Relations Order
Your retirement benefits will be divided between you and your divorcing spouse through a legal tool that is known as a Qualified Domestic Relations Order (QDRO). This document instructs the administrator of the retirement plan to divide your retirement account according to the family court judge’s orders. You and your spouse will both be identified on the QDRO as either:
- The saver (the person who earned the retirement benefits as part of his or her employment)
- The alternate payee (the person who stands to receive a portion of the saver’s benefits)
What about Taxation?
If you are years from retirement age and receive a portion of your ex's retirement benefits during your divorce, you will not be taxed or otherwise penalized. This is true regardless of your ex's age. Any retirement benefits that either of you brought into the marriage, however, remain that spouse's alone. Any earnings that accrued on either of your benefits during your marriage are considered community property by the State of Texas and must be divided in a manner that is deemed just and right. You can, however, lose out on benefits owed you if you fail to recognize their value during your divorce.