Divorce can be complicated, which can lead to emotional exhaustion and financial concern. You may have multiple financial agreements, insurance policies, and retirement accounts that are shared with your soon-to-be ex-partner that will need to be divided appropriately. Finding solutions that work for all parties involved is just one part of the puzzle, as you will also want to minimize any payments required to the government due to the reallocation and/or distribution of those assets. One type of retirement account that many couples ask questions about is a 401k retirement plan. 401k savings plans are typically sponsored by an employer and allow employees to save and invest a portion of their salary before withholding taxes. This type of retirement plan is incredibly common; and, during a divorce the funds must be split in specific ways to hold on to as much of the savings as possible.
There are several factors involved in dividing a 401k plan that determine how the money is to be split, including the balance of the 401k, where the couple lives, how the government will tax the 401k, and the value of the other assets in the marriage. Because Texas is a community property state, all marital assets must be divided 50/50 when a couple divorces. The key phrase in this case is “marital” assets. Any money invested in a 401k plan before the marriage is not considered community property and is thus not subject to division in a divorce. Before figuring out how to divide the marital assets, each partner will need to know how much they have. Each person should obtain a summary plan description (SPD) of their 401k plan and any other retirement accounts they hold. Each 401k plan should have an administrator that you can reach out to and ask about any specific rules that 401k has with regard to dividing assets. This information should then be given to your divorce lawyer to allow them to draft an agreement the plan’s administrator will accept.
If both spouses have similar balances in their 401k savings, they may each elect to keep their own savings and leave the ex-spouse’s untouched. However, if one spouse has significantly more savings than the other, it can be much more complicated. A court may order the spouse with more savings to give some to the other; however, this does not necessarily mean you will be required to liquidate the 401k and hand a portion of it over to your former spouse. You may not have to do anything with your 401k if you are able to offer your ex-spouse a different type of marital asset that is of comparable value. This could include a home or vehicle. If they accept, the retirement plan will remain untouched.
If you and your spouse agree that a portion of your 401k must be paid to the other, a qualified domestic relations order (QDRO) will be required. This court order gives one party the right to a portion of the funds in their former spouse’s 401k retirement plan. Typically, the funds from a 401k will be split into two new accounts, one for you and one for your ex-spouse. You will have full control over yours and will be able to contribute to it, but it will be completely separate from the funds possessed by your ex-spouse and they will neither be able to contribute to nor withdraw from your account. A QDRO is a good option for dividing funds from a 401k, but a party can also elect to withdraw funds to pay an ex-spouse. This, however, can result in the need to pay taxes on the funds being withdrawn if it is a traditional 401k plan. There will also be a penalty for withdrawing funds if you are under the age of 59 ½. If your spouse insists on this form of payment, the divorce agreement can stipulate that they are responsible for any taxes and fees resulting from the withdrawal. If you or your spouse have retirement plans that are funded with after-tax dollars, for example a Roth 401k, you will not owe taxes on your withdrawals.
In general, when dividing up a 401k you want to minimize taxes and fees as much as possible as this will cut into the hard-earned savings you have accumulated over the years. It is important to properly file all required paperwork and carefully detail how the division of assets will occur. Having an experienced divorce lawyer will help with this process as they can look out for your best interests. You may also be able to avoid taxes and fees by rolling over a 401k into an IRA if the plan allows you to do so. This way you can move a portion of your retirement plan to an IRA in your name and set up a separate IRA for your ex-spouse. There may be a small one-time fee for this option, however, you will not have to worry about paying taxes until later on when you retire.
Finding a solution for dividing a 401k is not always an easy process but by understanding what your 401k plan will allow and the state requirements for division of assets within a divorce, the process can proceed smoothly. It is also best to attempt to work with your ex-spouse to come up with a fair compromise in regards to retirement savings. This will make the process move quickly and will help keep your divorce costs down.
Brazoria County 401k and Divorce Lawyers
Terry & Roberts’ Brazoria County divorce lawyers work with our clients to establish divorce goals and reach the best possible outcome. When choosing a family law attorney, it is crucial to select a lawyer or law firm with extensive knowledge of Texas divorce law and financial regulations. Our divorce attorneys handle family law exclusively, giving our legal team the focus you need to move your divorce proceedings through the system efficiently and effectively. For clear, caring, and practical legal guidance to enable you to do what’s best for your family, contact us today.