What Happens to Your 401k During a Divorce in Texas?
Posted by Ramos Law Group, PLLC | Divorce
Many parties going through a divorce in Texas are concerned about how a divorce will affect their assets, especially a 401k or other retirement accounts. While it’s always best to consult with a divorce attorney, here are several things to keep in mind when thinking about how to protect your assets.
Separate vs Community Property
Texas is a community property state. If any part of a retirement account was earned during the marriage, it is considered a community property asset and is subject to a just division by the court. If any part of the retirement account was earned prior to the date of marriage, that would be considered a person’s separate property and could not be divided by the court.
When going through a divorce in Texas, it is important to have all of the documentation to show accurate balances for any accounts, both before and after the date of marriage so that a party’s separate property interest can be protected. There is a presumption that all assets are community assets, so the party alleging that an asset is a separate property asset has the burden to prove it.
It can be a lengthy process to obtain records, especially if an account was started many years ago, so to best protect your 401k when a divorce is on the horizon, it would be best to begin gathering relevant documents as soon as possible.
Restraining Orders and Injunctions
Typically, during a divorce in Texas, a court will issue a temporary restraining order or standard injunctions. These are put in place to preserve assets during the pendency of a divorce. This means that parties are prohibited from cashing out assets such as 401ks or IRAs.
It is inadvisable to cash out 401ks or take out loans against existing 401ks during the divorce process without express authorization from the court. If there is a financial hardship or urgency the court may consider that and allow an early withdrawal or loan, but typically a court prefers to keep the marital assets intact for a final division.
Changing 401K Account Details During Divorce
A person going through a divorce in Texas should consider the ramifications of altering their 401k contributions. Changing the level of your contributions can have a trickle-down effect, such as increasing income for child support calculations. It is important to discuss how changing the contributions can affect a divorce with a licensed Texas family law attorney.
Dividing 401k Funds
The actual division of the 401k funds during divorce depends on the totality of the community estate. If each party has a retirement fund of similar value, the court may not divide either and each party would be awarded their own retirement. If there is only one retirement fund, the court may divide it. If one party is awarded the marital residence with all of the equity, the other party may be awarded the entirety of a retirement fund to effectuate a just and right division.
Since the division of property is dependent on a couple’s specific facts and circumstances, it is important to discuss your individual case with a licensed Texas family law attorney.
How 401K Funds can be Transferred Between Accounts
Finally, if a 401k is divided in the final Texas divorce settlement, the court uses a legal document called a Qualified Domestic Relations Order. This order will effectuate the transfer or disbursement of the awarded funds from one party’s 401k account to the receiving party’s 401k account, IRA or similar account. There are typically minimal tax penalties or financial concerns if the funds awarded from a 401k are simply rolled over into another investment account. If a party declines to roll the funds into an investment account and prefers to cash out the value, then there will likely be financial and tax implications to consider so it will be important to discuss that option with a licensed Texas family law attorney.
Connect With a Specialist Who Can Help
There are an infinite number of issues that could arise relating to property division, and this article is intended only to give an overall idea and not to contemplate every possibility. To learn more, contact Ramos Law Group to consult with an attorney about your case.