An IRA, or Individual Retirement Account, is a type of defined contribution plan used by individuals to save for retirement. There are several different types of IRAs, including traditional, SEP, SIMPLE and Roth. Each type of IRA has different eligibility restrictions based on your income and employment status, as well as limits on the amount you can contribute in a given year. While IRAs are attractive options for individuals saving for retirement because of the potential tax benefits they offer, each imposes significant tax penalties if the money is withdrawn prior to retirement – unless you qualify for one of the few narrowly drawn exceptions.
How is an IRA divided in a divorce? Because individuals frequently contribute to IRAs during marriage, how they are divided upon divorce is a common question. Under Texas law, property that is acquired during marriage is community property unless it is acquired by gift, devise, or descent. For that reason, an IRA is considered to be community property to the extent that it accrued during the marriage and is subject to division upon divorce.
In 2005, the Texas Legislature added §3.007 to the Family Code, which helped clarify the tracing rules courts should use when determining a spouse’s separate property interest in a defined contribution plan such as an IRA. The separate property interest of a spouse in a defined contribution plan may be traced using the tracing and characterization methods that apply to non-retirement assets. The value remaining after determining the employee spouse’s separate property interest is considered community property. However, this does not mean that the community value of the IRA must be divided equally between spouses in a divorce. The Family Code requires that the property division upon divorce be just and fair, which is not necessarily 50/50. A court could, for instance, award the entire value of a retirement account to one spouse and award other assets to the other spouse.
As long as the division of the entire community estate is just and right, the award will not be reversed for an abuse of discretion. If the value of an IRA is divided between the parties, a Qualified Domestic Relations Order (QDRO) may be used, although it is not mandated under the Employee Retirement Security Act (ERISA).
If you have additional questions about the division of an IRA in your divorce, you should contact the expert attorneys at Orsinger, Nelson, Downing & Anderson to find out more.