Year: 2020

When people in Texas get a divorce, they may have retirement accounts to divide. Certain types of retirement plans must be split using a document called a qualified domestic relations order. A marital separation agreement or divorce decree is necessary when splitting an IRA. While this is normally a straightforward process, if the person who owns the IRA has been taking 72(t) distributions, there might be complications.

People are not supposed to take distributions from an IRA until they reach the age of 59 1/2. There are a few exceptions in which it is permitted, such as distributions to pay for certain medical or educational expenses. However, if there is a modification to the account, there is a retroactive 10% penalty on the distributions. According to IRS regulations, splitting an account in a divorce appears to fit the definition of a modification.

When a point of tax law is unclear, individuals can seek what is known as a private letter ruling. These are public but are only supposed to apply to the individual’s case. In PLRs about this issue, the IRS has not penalized individuals. It is impractical for many people to seek PLRs due to their cost and the time it takes, so people with 72(t) distributions who are getting a divorce may want to consult a financial professional.

In a community property state like Texas, couples are supposed to split property equally in a divorce. One alternative to dividing a retirement account might be for one person to keep the retirement account and the other to keep a piece of property of similar value, such as a home. Costs such as taxes on distributions from the retirement account or upkeep on the home should be taken into account when comparing these values.

Divorce rates are dropping among younger adults, but it is increasing among older adults. “Gray divorce” refers to this phenomenon, and the 65 and older age group is getting divorced at a rate that is three times higher than it was in the 1990s. Since Texas is a community property state, this means that assets are supposed to be divided equally.

This can mean making substantial changes to retirement planning. Money saved in retirement accounts was intended to support one household, not two, but people getting a divorce may need to divide their 401(k)s, IRAs or other retirement accounts. Some people may want to try to keep the marital home, but this can be expensive in terms of upkeep and taxes. It is important to understand the financial implications of doing so.

Spousal support may be temporary when younger people get a divorce, but it might be permanent for older adults. Some people may need to seek new health insurance after a divorce. For marriages that have lasted a decade or more, a lower-earning spouse may also be able to draw benefits on the other’s Social Security contributions in certain circumstances. Individuals who remarry may want to consider a prenuptial agreement since second marriages are more likely than first marriages to end in divorce.

Couples may want to consider negotiating an agreement for property division instead of going to court. Mediation can help even in high-conflict situations since the purpose is to reach an agreement that is mutually beneficial. This may give the couple more flexibility than they would have if they went to court. For example, they may not want to divide all their assets 50/50. Negotiating out of court may give them the opportunity to come up with a creative solution that better suits them both.