Of all the things for you to worry about due to your divorce case, you may not feel that your retirement is all that important compared to issues regarding your children, your home, and other more immediate considerations. After all, it's understandable to be concerned with just making it out of the case alive and in one piece. Having concerns about something that could be decades down the road is a little too far-fetched, it could be argued.
From my experiences as a family law attorney who has helped many, many people achieve successful divorce outcomes, I would caution you before you allow your mind to drift to this sort of thinking. The reality is that your retirement is a lot closer than you think, no matter what your age is.
If you are an older person, you may be in excellent health with a great job where you plan to work for many more years. And you may do so. However, this doesn't cause the time to stop progressing towards an end where you will no longer want to work. Thinking that you can make up for a lost time regarding your retirement ignores the benefit of allowing your money to grow with interest.
On the other hand, if you are a younger person, the easy opinion to hold is that your retirement is so long away, you can afford to make mistakes because time will allow you to patch over those holes and move forward as a success. This, too, would be a thought conceived in folly. The fact is that while you are further away than many divorced persons from retirement, there is no reason why you should not be aggressive and intelligent about making it through your divorce with as much of your retirement intact as possible. Just trying to get by is not the attitude I would take in your position.
Today's blog post from the attorneys with the Law Office of Bryan Fagan, PLLC, will detail retirement savings and their role in your divorce case. We want you to be able to walk away from your divorce in a strong position as it relates to retirement. I am not advocating for taking your spouse for all their worth and leaving them a shell of a person. You should assert your rights and petition for what is pretty yours under the circumstances of your case and the laws of the State of Texas.
Retirement Savings as Community Property
Monies invested into retirement accounts during your marriage are considered part of the community estate. If you and your spouse have been married for fifteen or twenty years, then there is likely a substantial amount of money in that 401(k) or IRA, assuming that you and your spouse have invested with any regularity. Understand also that dividing a 401(k), IRA, or pension in a divorce differs because both state and federal law applies to each of those types of accounts. You should consult with your attorney on each type of account's consequences on your case.
Qualified Domestic Relations Order (QDRO)
When your divorce has been completed, if you are entitled to a portion of any of your spouse's retirement accounts, then a Qualified Domestic Relations Order (QDRO) must be drafted. A QDRO allows whatever portion of the retirement account that was ordered to go to you in the divorce to be divided up without incurring any penalties or taxes. The plan administrator for the 401(k), pension plan, or another retirement account will have to "OK" the language in the order that will allow for its division. Also, a judge will need to approve the order and sign on it to have any legal force.
Do not wait for your divorce to be completed for the QDRO to be drawn up. Your attorney should contact the plan administrator and learn what language needs to be included for easy and quick approval. Then, when your Final Decree of Divorce is submitted to the judge, a request to have the judge sign and enter the QDRO should be submitted as well. This allows you to get both documents signed at the same time.
A QDRO identifies the person whose retirement benefits are subject to division and names you as the person who receive those payments. A specific dollar amount (or percentage of the total funds available) will also be specified. While you should consult with a financial planner on these issues, from my experience as an attorney, you can roll these proceeds directly into an IRA or into your 401(k) if your plan allows for that to occur. An immediate withdrawal of these proceeds is possible, and because you are doing it in the context of a divorce QDRO, there will not be a penalty assessed against you.
If your divorce decree orders that a portion of your spouse's IRA is sent to you, then you can do a direct transfer from their IRA to yours. There are no taxes or penalties for doing so, considering that your divorce decree must mandate this transfer.
What to know about social security and divorce
One of the critical concepts relevant for people like you who are going through a divorce has to do with social security. Specifically, you are entitled to one-half of your ex-spouse's social security retirement benefits when you retire. This is a great benefit available to you as an ex-spouse that I always encourage our clients to consider during negotiations.
This rule applies if your marriage lasted ten years or more and you are sixty-two or older when you attempt to cash in on the social security benefits. You could not have re-married in the interim period between your divorce and that point. If you have been married and divorced more than once, you cannot receive this benefit from both ex-spouses. The government would pay you benefits based on the amount from either spouse that would be greater.
College Savings Accounts
There are many ways to save for your child's college education. Perhaps the most common is the "529" college savings account. The money saved in these accounts can pay for room and board, books, tuition, and other school supplies. The beauty of the money saved in these accounts is that it is all after-tax, meaning that since you have already paid tax on the principal amounts, all of the growth is tax-free. If one child decides not to go to the child, their money can be transferred to another family member.
How you should invest in college educations is entirely up to you. Family law attorneys are typically not able to provide specific advice to you. Still, from my perspective, it makes sense to be in control of the money that you invest by being able to choose your investments rather than by having them selected by the broker or 529 plan administrator.
Tomorrow's blog topic from the Law Office of Bryan Fagan, PLLC, will be on college savings. We will go into greater detail on this subject than we could today. You will undoubtedly want to return to our website if you have kids. Learn about this subject now rather than waiting to do so after your divorce when it may be too late to make decisions that can positively impact your child.
Check in with us tomorrow to continue learning about retirement and divorce.
Questions about retirement and college savings as they relate to your divorce? Contact the Law Office of Bryan Fagan, PLLC, to learn more about these important subjects. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office.
We represent clients across southeast Texas- from Beaumont to Katy and all points between. It is an honor to represent these folks and their family during difficult times in their lives. We are just a phone call away and eagerly await the opportunity to sit with you and discuss your life and divorce.