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Precautions for protecting investments during divorce

Divorce can mean that some people in Texas have significant assets to split, such as annuities, securities, retirement accounts and more. It is important to understand the rules associated with dividing these accounts in a divorce and how to avoid or minimize taxes and penalties.

Withdrawing from retirement accounts or annuities can carry significant penalties. For some investments, the easy solution might seem to be selling the asset and splitting the profit. However, for some assets, such as securities, a sale might trigger capital gains taxes. To divide a 401(k) or a 403(b) in a divorce, it is necessary to have a qualified domestic relations order, a type of court order. This goes to the plan administrator. While a QDRO is not necessary for an IRA, the funds usually must be rolled into new IRAs to avoid penalties. People should keep in mind that withdrawals may be taxed from some types of retirement accounts. This tax should be accounted for when assessing the value of retirement accounts.

People may need to take other steps to protect themselves financially. A spouse who is concerned about the other spouse misusing shared financial accounts may need to freeze those accounts. Ex-spouses may need to be removed from beneficiary designations so that they do not inherit assets after the divorce.

In Texas, a community property state, most property either spouse acquires after marriage is supposed to be divided equally after divorce. However, couples who reach an agreement in divorce mediation instead of going to litigation might be able to come up with more creative solutions. They may divide their assets in a way that allows each to get assets of roughly the same value, but each asset does not have to be split 50/50. This may be less expensive and stressful than litigation.

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