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How can you avoid mistakes dividing 401(k) assets in a divorce?

If there is one topic, in relation to divorces, that I think is probably the least interesting in the opinion of people who actually go through divorces it is 401K division. In the best of times, we will typically leave discussions of this subject to our financial advisor and two reviewing quarterly or biannual statements about how our 401K investments are doing relative to the market. Watching grass grow, watching paint dry, and reading about retirement savings and 401K plans are all up there in terms of some of the most boring discussions a person can have. 

However, the subject matter of dividing up a 401K in a divorce is very important. Many of you have worked hard over a long stretch of time to save up for retirement. How many of us I lay awake on occasion at night thinking about what our golden years are going to be like in whether or not we're going to have enough in the bank to afford the basics of life like health insurance, food, shelter and enough security to be able to do nice things for our families? I think this is a concern even for those who are doing well financially but are insecure about their post working lives. 

In this case, your post work life in your post-divorce life, crashing together and we need to decide how you can best prepare 2 divide up your retirement savings contained in a 401K. Keep in mind that your retirement savings in this discussion as a whole our a part of a much larger discussion that deal with community property and how it is divided between you and your spouse. Like anything else in the divorce, the subject of retirement savings and how retirement savings in a 401K are divided is not limited to this area of your case alone. How your retirement savings will be divided can have a significant impact on other areas of your case. 

With that in mind, I think the most logical way to attack this subject will be to look at it from the perspective of how community property is classified and divided in a divorce in Texas, then how retirement planning and saving falls into that discussion and finally how the division of your retirement benefits can impact other areas of your case. To start the discussion, I will layout a hypothetical individual and we will base our remaining sections of the blog posts on this hypothetical person and how he or she could see things play out in regard to their 401K, property division and their divorce as a whole. 

Dividing marital property in a Texas divorce 

the property that you and your spouse own well he divided under the laws of Community property in Texas. To examine this subject, I am going to assume that you are a married woman in her 50s. You are still working and have some retirement savings within a 401K through your employer. You have no children who are under the age of 18 and are therefore not legally responsible for caring for your children at this stage in your life. You have no major medical concerns but then again you don't know how much longer you are going to be able to work at your current level. 

On the other hand, your spouse, a man in his 50s, is a successful professional and also has a workplace 401K that he has contributed to on a consistent basis over the past 25 years. Given that your marriage has lasted 25 years most of the contributions to each of your retirement plans has come during the course of your marriage period this will prove to be an important fact when we enter our discussion of how the Community property portions of that retirement account are divided. Keep in mind that your spouse has been the primary breadwinner and works in a field where he can conceivably continue to engage in employment for many years into the future. Not only that, but his ability to increase his income significantly is available to him should he need or want to begin to earn more money. 

Community property law in Texas dictates that all property owned by you and your spouse at the time of your divorce is Community property. Importantly, Community property is subject to being divided in the divorce. Therefore, it is presumed that every piece of property that you own at the time of your divorce is going to be divided in the divorce case itself. But you need to keep in mind is that there are ways to avoid needing to adhere to every element of Community property law but that you and your spouse we'll need to work together to divide up your community estate as a team. Otherwise, a judge will adhere to the laws of Community property and that could impact your divorce in significant ways. 

When I say that all property is presumed to be community owned at the time of your divorce, I do not just mean physical property. I mean all property: your vehicles, your home, your bank account, your personal property, real estate, and even your retirement accounts. In Texas, the law does not distinguish between property that bears your name or bears the name of your spouse. There is no designation for your Community property and your spouse is Community property. So long as the property was purchased or acquired during the course of your marriage then it will be Community property in a divorce. That means you and your spouse will likely need to have it divided up in some form and fashion. 

As opposed to Community property, separate property is any property owned by you or your spouse that was acquired or purchased prior to the beginning of your marriage. For most of us, if we started off our marriages with little in the way of income or property then you can presume that most all of your property owned at the time of your divorce is Community property. For those of you who got married later in life then you may have more separate property than other people do. Using our hypothetical example from above if you fall into the same category as this woman then you can assume that most all of your property is Community property given the length of your marriage and your age now. 

If you find yourself in a position where you are needing to prove that particular pieces of property are separate property, then there are two ways that you can go about doing this. The first is to simply point out to your spouse that property is yours separately. It is likely that your spouse will do the same thing. Most of the time spouses can agree on just about all of their property falling into a category of community or separately owned. If you find yourself in a position where you need to prove that property is separately owned then you will need to provide a paper trail, receipts, purchase documents or title documents showing that particular pieces of property are separately rather than community owned. 

The importance of dividing up Retirement benefits in a Texas divorce 

Now that we have discussed some of the more essential bits of information regarding Community property law in Texas, we can get down to discussing the importance of how your 401K is divided in Texas. We want to make sure that the accounts are divided up in a way that is agreeable to you and your spouse, follows your agreed upon method that you arrive at in mediation in that the money can be transferred expeditiously and correctly after the conclusion of the divorce. You want to avoid a situation where you were able to successfully negotiate through this issue with your spouse but then, because of some issues in drafting paperwork, the money is not able to be transferred or divided easily. 

If you find yourself in a position like our hypothetical woman from above, you and your attorney should obtain from your spouse’s retirement plan administrator the language that needs to be included in your final decree of divorce as far as how his 401K can be divided. Each individual retirement plan from various companies will require that certain language be included in divorce paperwork that allows a plan administrator to divide up the 401K as the parties wish. Your attorney should obtain from your spouse’s attorney the name and contact information for the plan administrator. That way you all will have exact knowledge of what needs to be contained in your final decree of divorce and in any other paperwork needed to divide up the retirement account. 

One additional document that will almost always be needed in a divorce to divide up retirement benefits and a 401K is a qualified domestic relations order. A QDRO for short, A qualified domestic relations order will spell out in greater detail the means by which an specifics behind how the 401K is to be divided up between you and your spouse after a divorce. Depending on your spouse’s employer you will need to get permission to do so from the plan administrator and obtain information on how this document needs to be drafted. As suggested by the name of the document, it is a court order and therefore needs to be signed off on by a judge prior to it having any kind of legal effect. 

In terms of preparation, the woman that we have discussed in today's blog post and you as well should include this qualified domestic relations order in your final paperwork to be signed by the judge at the conclusion of your case. You want to avoid a situation where the judge signs off on your final decree of divorce sign off on the qualified domestic relations order. This presents a situation where your attorney will have to go back after the conclusion of your divorce in order to seek the judges signature on this document. This presents needless delays then you may find that a judge is unwilling to sign unless you request a hearing to cover this subject.

in conclusion, you will want to make sure that you take into account the rest of your divorce case when determining how a retirement benefit should be divided. For example column if you fall under the same category as the woman above, where your spouse is the primary breadwinner and you have less of an opportunity to earn additional money for retirement later in life, and you may want to be more aggressive in negotiating for division of this 401K benefit. Rather than pulling numbers out of the air you should have your own retirement benefit laid next to your spouse’s so that he can tell where you are coming from in regard to the positions you hold. 

If the retirement benefit held by a spouse is not sufficient for your retirement needs to be met in combination with your own retirement benefits, then you may need to request post-divorce spousal maintenance from your spouse. Spousal maintenance can be requested and negotiated for through something called contractual alimony. Contractual alimony allows you and your spouse to negotiate upon a set amount of post-divorce spousal support to be paid from him to you for certain period time period this would make up for the lack of retirement benefits that could be derived from either of your 401K's. In addition, should your case make it all the way to a trial and judge me awards you spousal maintenance based on the length of your marriage and other circumstances in your case such as your future needs and your ability to enter the economy and earning income for yourself. 

Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan

if you have any questions about the material that we have covered in today's blog post I recommend that you contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultation six days a week in person, over the phone in via video. These consultations are a great way for you to learn more about Texas family law and the services that we provide to our clients. 

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