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How to Divide a 401(k) Plan in a Texas Divorce

Understanding the Process of Dividing a 401(k) in a Divorce

Out of all the assets that can be divided in a Texas divorce, retirement plans are probably the trickiest of all. The most common retirement plan shared by spouses is the 401(k), a retirement savings plan typically sponsored by employers. Basically, a 401(k) allows employees to save and invest a part of their salary before withholding taxes.

Many Texas couples who have finally wrapped up their divorce proceedings are often surprised their retirement accounts are also affected by the property division process. But how exactly does this happen with 401(k) plans?

Dividing a 401(k) in a Texas Divorce

Because Texas is a community property state, any part of the 401(k) earned while a person is married is owned co-equally by the couple. But while retirement plans are counted as property to be divided in a divorce, the court must first determine how much of the 401(k) was earned during the marriage and how much was earned separately. This, however, is easier said than done. Even if a large part of the 401(k) was earned separately (i.e. you started your plan long before you were married), the interest accumulated by the plan is likely to be considered community property.

So, if you or your spouse wish to divide the interest on the plan, your Texas divorce attorney must first determine the value of the plan at the time you were married (the plan value as a separate property) and subtract it from the value of the plan upon divorce.

The difference would be the interest amount, which the spouse without a 401(k) plan can claim.

Unfortunately, the actual execution of this formula is rarely a simple affair.

Splitting a 401(k) With Inflation

One of the main issues of dividing a 401(k) in a divorce is disagreement over the formula for calculating interest and amount to be divided. Although the formula is often used in many property division cases in Texas, it is not accepted by everyone due to a number of reasons:

  • The formula does not account for inflation in shares, which many argue should be counted as separate property
  • The standard formula considers these shares as community property, resulting in inaccurate calculations for determining interest as well as the ratio of community property to separate property

Texas courts recognize this problem, hence their recommendation to consider other methods and factors to determine separate property and community property in 401(k). An Austin Texas divorce attorney will prove invaluable in this area, helping you look at the big picture and divide the retirement plan fairly between spouses.

Splitting a 401(k) With a Loan Balance

Splitting a 401(k) in a divorce gets even more complicated if either spouse took out a 401(k) loan. While the 401(k) statement will indicate the loan balance and account balance, the latter will not include the loan taken out. If your divorce attorney does not know any better, he or she might make the mistake of deducting the loan from the current 401(k) balance.

Most plan administrators in Texas will tell you this is a mistake because of the fact that if you were to take out a 401(k) loan, that amount is something you owe yourself and not a third-party lender. It’s literally a loan taken from your savings, which technically makes it both a loan and receivable.

So, the right way to show this loan on the property division spreadsheet is by accounting for the loan when writing down the balance, which will ensure a proper division of the 401(k) by the court.

Given the complicated nature of dividing retirement plans, you need an attorney who is well trained in property division. Call the Lyttle Law Firm today to find out how we can help. Contact our offices today to schedule a consultation with Texas family law attorney Daniella Lyttle.

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