Couples who choose to get divorced when they are older may have a retirement account such as 401k or an IRA to divide in the process. However, even if a Texas couple splits amicably, it is necessary to allocate the funds within the account properly. Otherwise, it could result in an unnecessary tax hit or otherwise jeopardize an individual's financial situation. If a 401k is being divided, it must be done under the terms of a qualified domestic relations order (QDRO).
This order will allow funds to be transferred into the name of the other spouse. When the transfer occurs, funds that are put directly into a 401k will not be taxed. If funds are taken out of the account, it will be necessary to pay income taxes, but no early withdrawal penalty needs to be paid. The reason why funds inside of a 401k or an IRA may be eligible to be split is that funds used to grow the account are generally considered marital funds.
Therefore, both parties are entitled to a share of it as a marital asset. An IRA does not need to be split under the terms of a QDRO. However, it will need to be split in accordance with a divorce decree. When the divorce is official, it may be a good idea to change existing beneficiary designations on a retirement account.
Resolving issues related to property division in a divorce may be among the top priorities a divorcing person may have. An attorney may be able to explain what types of assets may be divided and why. An attorney may also be able to help craft a divorce settlement that allows an individual to obtain or retain much of a 401k or other items accumulated while married.