Couples in Texas who get a divorce should understand the tax ramifications of the dividing their financial assets and take care to follow the correct procedure when dividing certain types of assets. For example, for divorcing couples who want to split a workplace retirement plan, it will be necessary to obtain a qualified domestic relations order, a legal document that details how much of the employer-sponsored retirement benefits of one spouse will be given to the other spouse.

Individuals who are recipients of their ex-spouse’s workplace retirement plan and who are younger than 59.5 years old will be able to take advantage of a one-time exemption for the withdrawal penalty. While they will not have to pay the penalty, which is 10 percent of the withdrawal amount, they will still be assessed taxes on the funds that are withdrawn from the plan. However, if the money is transferred to an IRA, they can avoid having to pay any taxes.

No QDRO is needed to divide individual retirement accounts. The proper procedure for dividing IRAs entails detailing the division in the separation agreement or divorce decree. If the terms of the divorce require that a portion of one party’s IRA is allocated to the other party, the custodian of the IRA should be asked to transfer a specified dollar amount or a percentage of the IRA directly into the ex-spouse’s IRA. If the allocated portion of the IRA is cashed out and given directly to the ex-spouse, taxes will be assessed on the distribution amount.

A family law attorney may advise clients about what legal strategies should be pursued to obtain the desired divorce settlement terms for the division of financial assets. Litigation may be used to ensure that clients obtain the portion of their ex-spouse’s retirement funds to which they are entitled.

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