Roth IRAs in Divorce Cases in Texas

by Heather Frances J.D. Google

A Roth IRA allows contributors to save for retirement by paying taxes at the time they earn the money they contribute to the IRA account and withdrawing the money tax-free when they retire. In a traditional IRA, the contributor pays taxes at the time of withdrawal rather than contribution. Either type of IRA is subject to division in divorce, and the same transfer rules apply to both.

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Community Property

Texas is a community property state, which means most property the spouses acquire during the marriage is considered community property, divisible in a divorce, regardless of whether the property is listed in one spouse’s name or both names. Generally, a spouse does not have to divide pension or retirement funds that accrued before the marriage because these are considered the separate property of the one spouse, but funds contributed during the marriage are considered community property.

Timing of Transfer

If spouses take money from their Roth IRAs before retirement, those distributions are heavily taxed unless they are withdrawn for an authorized reason, even though the taxes have already been paid on the contributions. While divorce is one of the authorized reasons to withdraw money early, the transfer must occur after the divorce decree is issued to avoid tax penalties.

Transferring a Roth IRA

One spouse can transfer a portion of his Roth IRA to the other spouse by providing a check to the receiving spouse’s IRA account. If the check is in the receiving spouse’s name directly — rather than the name of her account trustee — the distribution can be taxed. The receiving spouse has 60 days to reinvest or “rollover” the distribution to her own IRA. If the entire IRA is being transferred, spouses can simply change the name on the IRA account.

How Much

Spouses can reach their own agreements regarding retirement accounts. Spouses can record their agreement in a marital settlement agreement and incorporate it into the divorce decree. Spouses can agree to waive their rights to each other’s retirement benefits or give up rights to retirement benefits in exchange for a greater portion of property or spousal support. If spouses cannot agree, a judge will determine how the couple’s property — including IRAs — will be distributed; the judge's distribution must be fair and just; however, this does not necessarily mean equal.