If you live in Texas and are getting a divorce, you may need to go through a process of dividing an annuity, an IRA or a 401(k). You may want to consult a financial professional along with your attorney during this process since there can be complex tax implications.
Annuities and IRAs
Annuities can be particularly complicated because there may be taxes, penalties, and fees. However, the IRS does make exceptions when the reason for splitting the annuity is divorce. The IRS will not consider it a taxable event if there is a withdrawal from the annuity and new contracts are created. A court order is required to split an IRA, and rolling assets into a new IRA allows you to avoid the early distribution penalty.
401(k)s and Pensions
The first thing you will need to divide a 401(k) is a document known as a qualified domestic relations order. You have a few other choices. The simplest approach might be for one person to keep the 401(k) and the other spouse to take another asset of equal value. However, it is important to take any taxes or anticipated increase in value into account with this approach. The 401(k) could also be liquidated with each spouse taking part of the money, but this would incur taxes and penalties, and you might not qualify for it. If you are no longer with the employer or are older than 59 1/2, you could roll the 401(k) into an IRA. Pensions may be more straightforward, and in many cases, benefits may be paid directly to an ex-spouse.
In Texas, a community property state, any marital property is supposed to be divided equally. Your attorney may be able to help you negotiate an agreement with your spouse. This could give you more control over the divorce settlement, but in some cases, it might be necessary to go to litigation where a judge will make a decision.
At Balekian Hayes PLLC, we strongly recommend seeking legal counsel, particularly in cases involving substantial assets or high net worth. Our law firm has a sterling reputation in the Dallas, Texas, area. Founded by Kris Balekian Hayes, we have a team of knowledgeable asset division attorneys thoroughly familiar with Texas family law who can assist you in understanding your rights.
Our team has assisted hundreds of clients in working through division of retirement assets. Contact us today for a consultation if you face divorce or other family law issues.