Dividing assets is one of the trickiest aspects of any Texas divorce, and splitting benefits from a retirement plan can be especially problematic. In many cases, former spouses close to finalizing their divorce proceedings are taken aback when a 401(k) unexpectedly throws a wrench into the works.
To learn more about what happens to 401(k) plans during divorce proceedings and what you can do to preserve your assets, continue reading or contact Hargrave Law, PC, for a consultation with an experienced Texas divorce attorney.
Understanding Your 401(k) Plan
According to the Internal Revenue Service (IRS), a 401(k) is a type of employer-sponsored retirement plan that allows employees to redirect a portion of their income into specialized savings. Money invested in a 401(k) plan is not subject to typical income tax withholdings, which means employees can retain more of their earnings as they save for the future.
Texas is a community property state, which means any contributions or earned interest that accumulate in your 401(k) during your marriage are considered marital property. When Texas couples divorce, the portion of the 401(k) earned while the couple was together must be divided equitably between them. That said, “equitable” doesn’t necessarily mean a 50/50 split. Moreover, it can be difficult to calculate exactly how much of the 401(k) counts as marital property.
Keep in mind that you must obtain a court order to divide 401(k) assets during a divorce. A judge will need to approve a Qualified Domestic Relations Order (QDRO) that confirms that the proposed 401(k) distribution is equitable before the divorce is finalized.
How Can You Split Up a 401(k) in a Divorce?
Dividing 401(k) assets equitably is one of the most complicated issues many couples face during divorce proceedings. While individual 401(k) plans can have unique rules and requirements for distribution, many are split up in one of the following four ways:
- You keep your entire 401(k) and allow your spouse to take other marital property worth a similar value. This may seem like the simplest option, but you’ll need to account for long-term tax obligations and changes in 401(k) value.
- You and your spouse split assets from your 401(k) evenly. To do this, you’ll need a QDRO from a family court judge. If you choose this route, it’s often easiest to split the 401(k) into two accounts that you and your spouse manage separately.
- You liquidate a portion of your 401(k) and give it to your spouse as a lump sum payment. This can have undesirable tax consequences, so it’s an uncommon choice unless one spouse needs the cash to resettle after the divorce.
- You transfer a portion of your 401(k) into a separate IRA or 401(k) managed by your spouse. This can help you avoid tax liability, but it’s only an option if you’re over the age of 59½ or no longer with the employer who originated the 401(k).
Tips to Avoid Headaches When Dividing Your 401(k)
If you aren’t careful, you could lose your fair share of the benefits from your 401(k) plan. You can avoid unnecessary headaches and protect your rightful assets by:
- Contacting an experienced divorce attorney as soon as possible and keeping them in the loop during every stage of the process.
- Working with a CPA or financial planner who can help you understand the tax and liability consequences of your financial decisions.
- Requesting QDRO guidelines and samples from your 401(k)-plan administrator to ensure you understand how to create this crucial document.
- Remembering to consider your spouse’s 401(k) benefits, if they have their own, when you negotiate the distribution of your 401(k).
Contact a Bedford Divorce Lawyer
If you have questions about how your assets will be divided in a divorce, turn to an experienced Bedford divorce lawyer from Hargrave Law, PC for the knowledgeable counsel you need and deserve. For more than two decades, we’ve helped people like you understand their rights and have guided them through the often complicated process of divorce. We’ll be here to help protect your interests, so call us at (817) 212-0679 or reach out to us online for a confidential consultation today.