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Blogs from October, 2016

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Many Waco residents participate in retirement plans through their employment that they build upon during their marriages in anticipation of retiring together at some point. However, not all marriages last, and those carefully made retirement plans disappear. Furthermore, the funds in your 401(k) will more than likely be divided in the divorce.

How much of my retirement plan does my spouse get?

Texas is a community property state, which means that each of you owns all of the assets acquired during the marriage jointly, including each of your incomes. If you did not begin participating in your 401(k) until after you were married, you and your spouse own 100 percent of the account together. If you were already participating in the plan prior to the marriage, any amounts contributed by you and your employer prior to the date of marriage should be considered your separate property, and the remainder of the account will be part of the marital estate.

Stop! Do not just transfer your spouse's share of your 401(k) without a QDRO

Before any funds can be transferred to your spouse, you will need a Qualified Domestic Relations Order (QDRO) signed by the judge. This order outlines the percentage or amount to which your spouse is entitled from your account and prevents you from owing the taxes and penalties that are ordinarily assessed when an early distribution is made. Prior to asking the court to sign such an order, it would be a good idea to check with your plan's administrator to make sure it complies with the provisions of your plan.

Now that you have a QDRO, how is the money transferred to your spouse?

Your spouse has three options for obtaining his or her share of your 401(k):

  • Direct transfer (rollover) into a different qualified retirement account
  • Defer distribution until retirement (amount may be taken in one lump sum or payments)
  • Cash distribution (penalties may apply)

Regardless of how the money is transferred, you and your spouse do not have to rely on the court to determine how the account will be divided. If you and your spouse would prefer to negotiate your own divorce settlement, you can divide your marital assets in any way that is agreeable to you and your soon-to-be ex-spouse. Even though Texas is a community property state, you do not necessarily have to divide each asset down the middle. As long as the agreement does not leave you or your spouse at a financial disadvantage, it should be approved by the court.

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