What will a Texas divorce do to your 401(k) account or pension?

On Behalf of | Feb 26, 2020 | Divorce

Divorce is a kind of financial double whammy. At the same time that your household income drops because you end your marriage, you will also incur substantial costs related to court fees and other legal expenses due to your divorce.

When you add to all of that the fact that you will likely need to split all of your assets and retain half of the marital debt in most cases, it is natural to worry about your financial future. The older you are when you realize the end of your marriage is near, the more pressing concerns about finances for retirement may seem to you.

Once you understand how the courts view and handle the division of retirement accounts or pensions in a divorce, you can feel more confident in your financial planning and decisions.

Is there a prenuptial or postnuptial agreement to help?

One of the best ways to protect a specific asset is to enter into a prenuptial or postnuptial agreement that designates that asset as separate property. Texas is a community property state, which generally means that anything you acquire or earn during the marriage gets shared with your spouse, even if there’s a substantial discrepancy between your incomes. A written agreement can help you protect your most precious assets and even allow for a faster and more affordable divorce.

Contributions made during the marriage are likely vulnerable to division

Barring any sort of agreement that protects your retirement funds or pension as separate property, chances are good that any amount you earned or deposited during the marriage could wind up subject to division with your ex. In some cases, the courts may simply use the value of retirement funds or pensions to offset other assets, such as the marital home.

Other times, they may issue a qualified domestic relations order (QDRO) which instructs the plan administrator to separate a specific percentage of the account and place it into a new account in the name of the other spouse. When such a split occurs in compliance with a divorce-related QDRO, there will not be any tax penalties or fees assessed as there would be in the case of an early withdrawal.

Splitting a pension is often harder to do, as although there is a balance, it isn’t necessarily an account that you can pull funds from. Instead, it is a benefit that your employer will pay after you retire. Again, the courts can choose to use the value of the pension to offset other assets. However, they may also choose to order spousal support, also known as maintenance or alimony, for the duration of the pension to ensure that the split is as fair as possible.