What Happens to your 401K after a Divorce?

Your 401K after Divorce

It's January. Time for people to take stock of their weight, love life, and financials (among other topics). Maybe you're envisioning a future that doesn't include your current spouse. And maybe you want to start saving more money for that future and are looking for ways to increase your savings. Upping your 401K percentage is one good way to do this. As Texas divorce lawyers we would like to share this free tip: you might want to hold off on the latter if you're thinking about the former. One of the most common types of employee benefits today is the 401K. Employers usually match a percentage of your investment (think free money!), and the money that goes in stays tax-free until it is withdrawn. These two benefits make it an attractive retirement savings option. Outside of home ownership, it is often the largest investment a couple has and can play a significant role in a divorce settlement. Along with Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin, Texas is one of the nine community property jurisdictions in the United States. Community property is all property and assets gained during the length of a marriage. Almost anything of value acquired during the marriage is considered community property.
 A 401k plan can be acquired before marriage, known as separate property, or acquired during the marriage, known as community property.  Sometimes these values need to be researched to decipher these divisions. This is an arduous task best done by an attorney. The process would start with the attorneys gaining access to your (and your spouse's, if they have one too) 401K's year-end statements. The assets will be traced back to the beginning of the marriage to decipher how much of the investment is community property. If contributions started and were only made during the marriage, then all of it is community property. Much of a 401K will be community property for long marriages and first marriages with a couple who started out together. Sometimes a 401K can be a combination of community property and separate property. Some number crunching will be necessary to figure out the how the 401K is divided if this is the case. Once this is decided a lawyer will draw up a Qualified Domestic Relationship Order. A QDRO describes the details of the 401k property division.  A QDRO is prepared and then sent to the 401K Plan Administrator.  The Plan Administrator then grants the alternate payee (ex-spouse) with an ownership stake in the 401K.  Two separate accounts are then created.  Each divorcee is now in charge of  his or her own account and can allocate and handle the funds in the way he/she sees fit. If you are thinking of bumping up your 401K and are thinking of getting a divorce, you might want to wait until those papers are signed and assets are divided. Or else you will only be taking a portion of the 401K bump up away. The division of a 401K and other investments during a divorce can be confusing and cumbersome. At Puhl and Berbarie we are well-versed in dividing assets and getting a fair divorce settlement. Please feel free to call us for a free consultation.

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