Partition of Retirement Plan Benefits by Texas Residents
If you’re a married Texas resident who works for a state agency or a private employer that offers a 401(k) or other retirement plan in which you participate, you and your spouse can transfer money out of that retirement plan and into a multitude of self–directed investment options without incurring any income tax consequences, regardless of your or your spouse’s age.
In Texas employer–sponsored retirement plan benefits can be rolled over into a new self-directed IRA or 401k and from that account invested in a multitude of self–directed investment opportunities or healthcare uses.
In Texas, all benefits contributed to or paid into a married person’s retirement plan are community property to which both spouses have an equal claim under Texas community property law.
The Texas Family Code codifies the Texas laws relating to marital property and specifically allows a married couple to divide their community property between them in whatever percentages they desire by entering into a written agreement called a “Partition Agreement”. This partition dissolves the community property nature of marital property and creates two separate property estates, each of which is owned by the individual spouse as their “separate property”. Each has full control over the use and disposition of their respective separate property estates.
The procedure to partition retirement plan benefits begins with the spouses signing a Partition Agreement that partitions only the plan benefits held in the name of one of the spouses – all other marital property retains its status as community property. The percentage of plant benefits partitioned can be any amount the spouses choose, up to 90%.
A legal petition is then filed with a Texas state court asking the court to enter an order dividing the retirement plan benefits in accordance with the percentages set forth in the Partition Agreement.
A proposed court order is then prepared and submitted to the plan administrator for approval. All plan administrators, for both private and government–sponsored plans, have created procedures for reviewing and approving such orders, known as qualified domestic relations order, or “QDRO”. Most plan administrators have outsourced the supervision of QDROs to third–party “QDRO administrators.” A proposed QDRO must be approved the plan/QDRO administrator before it is presented to a court for entry.
After the plan/QDRO administrator has approved the proposed QDRO order, it is submitted to the court for signature. The signed QDRO order is then forwarded to the plan administrator for implementation according to its terms.
The plan administrator then creates a separate account for the benefit of the non–participating spouse and transfers the percentage of plan benefits set forth in the QDRO into that account. At that point, the benefits/assets transferred into that account will be the separate property of the non–participating spouse and the remaining balance of plan benefits will be the separate property of the participating spouse.
A new, self-directed IRA or 401k is then created in the name of the non–participating spouse and the partitioned plan benefits are transferred (“rolled over”) into that account, from which self–directed investments can be made and healthcare choices implemented. No taxable event takes place on a rollover, regardless of the age of either spouse. No income tax on withdrawals from the IRA is paid until actually made.