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Dealing with a 401(k) in a divorce

| Oct 27, 2020 | Divorce |

People in Texas spend years planning for their retirement, all the time assuming that their spouses will spend those years with them. It goes without saying that divorce impacts those plans significantly. Yet that impact may go beyond one’s companionship during their retirement years.

One of the main sources of income people plan on having available to them during their retirement is their 401(k) funds. What they may not realize prior to entering into their divorce proceedings is that family courts view those funds as marital assets (or more specifically, the money contributed to a 401(k) during a marriage). Upon learning this, a 401(k) account holder may then want to know how the court handles the division of those assets.

Dividing up 401(k) contributions

In most cases, the court will issue a Qualified Domestic Relations Order that authorizes a 401(k) plan sponsor to make a disbursement to an alternate payee. This opens the door for an equitable portion of the 401(k) contributions subject to property division to transfer into another account (either the non-contributing spouse’s already existing 401(k) or an entirely new account). According to the website SmartAsset.com, cashing out a portion of a 401(k) during a divorce is also an option (as the unique circumstances allow one to avoid an early withdrawal penalty).

Retaining the full value of a 401(k)

The 401(k) Help Center also points out a 401(k) account holder can also try to keep the full value of their account. To do this, however, they have to get their ex-spouse to agree to forgo their stake in the 401(k)’s assets. This will likely require that they also relinquish their interest in another marital asset of comparable value in return.