No matter the stage of your career—whether you are planning for advancement or you are working toward retirement—your retirement savings is one of your most valuable investments.
What happens to the investment you have made in your 401(k) if your marriage ends in divorce?
Is your 401(k) separate or community property?
Texas law views most property, funds and debt acquired during your marriage as jointly owned by you and your spouse. As a result, while the money you set aside before your wedding is yours alone, contributions made during your marriage are subject to division in a divorce.
There are some exceptions to this, however. If you and your spouse had a prenuptial or postnuptial agreement in place, this agreement could designate your 401(k) as your sole property.
Will the court divide your savings evenly?
While the retirement benefits acquired during your marriage belong to both you and your spouse, that does not mean that the court will split them evenly between you. Depending on circumstances like your child custody arrangement, one spouse may receive a greater portion of your assets than the other because of their unique needs. You may also agree that one spouse will keep their retirement accounts intact in exchange for the other keeping another asset of similar value.
How can you address the financial impact of dividing your 401(k)?
Early withdrawal of retirement benefits from a 401(k) leads to a higher tax burden, which can provide unique challenges to younger couples dividing their retirement benefits. However, a qualified domestic relations order is a court order that allows you to divide your accounts without suffering that penalty.
It may also be possible to roll over your savings into an IRA with a small rollover fee without accruing a significant tax burden.
While dividing retirement savings like your 401(k) can be a complex part of divorce, it is possible to create a legal strategy that protects your investment in your future financial health.