Retirement accounts are often among the most valuable assets a couple owns. A 401(k), IRA, pension, or military retirement account can represent decades of savings. These accounts may be worth hundreds of thousands, or even millions, of dollars.
Because Texas is a community property state, a spouse’s name on a retirement account does not necessarily determine who gets the money in a divorce. Instead, Texas courts must determine which portion of the account is community property and which portion, if any, is separate property. For spouses with significant retirement savings, getting this calculation and division correct is critical, as it can have long-term financial and tax consequences.
At the Law Office of Jason Wright, we help clients in Austin and throughout Central Texas understand how their retirement assets may be characterized, valued, and divided as part of a divorce. We then work to protect our clients’ interests, whether that means working out a negotiated settlement or taking the case to court. Reach out to our law firm today to schedule a confidential consultation with an Austin divorce attorney.
Is a 401(k) Community Property in Texas?
Texas is a community property state. During a divorce, only community property and debt are subject to division. Separate property is not divided, and the spouse who owns the asset or debt retains their ownership.
At the time a petition for divorce is filed, all property and debts are presumed to be community property. Community property is all property acquired, including income from a spouse’s separate property. Under Texas law, separate property includes any property owned by a spouse before the marriage, property received as a gift or inheritance to one spouse during the marriage, and certain money received by one spouse for personal injuries that occurred during the marriage. Unless both spouses agree that an asset is separate property, a spouse must prove that something is separate property by clear and convincing evidence.
Generally, retirement benefits earned during a marriage in Texas are considered community property. This is true even when the retirement account is held solely in one spouse’s name.
Under the Texas Family Code, a judge in a divorce case must determine each spouse’s rights related to retirement plans, pensions, annuities, IRAs, and other employee savings and benefit plans. A court will look at when the retirement benefits were earned or accumulated and whether the spouse whose name is on the account can prove that they have a separate property interest in the account.
For example, consider a situation where a husband opened a 401(k) account before getting married and had accumulated $100,000 in the account as of the date of the marriage. During the marriage, he contributed another $200,000, including employer contributions. The account grew to $500,000 by the time that the couple divorced.
The $100,000 that existed in the account before their marriage may be the husband’s separate property if he can adequately trace it and prove that it is separate property. The contributions and growth during the marriage may be community property.
However, the calculation is not necessarily as simple as subtracting $100,000 from the current balance. Investment gains, losses, contributions, withdrawals, and other transactions may need to be traced. That is one reason retirement account division can become significantly more complicated in high-asset divorces.
Can a Portion of a Retirement Account Be Separate Property?
A retirement account may contain both separate and community property. Separate property may include retirement benefits that were earned or accumulated before the marriage, assuming the spouse can establish their separate character. Property acquired by a spouse before marriage is generally separate property under Texas law.
The spouse claiming separate property has the burden of proving that characterization. Documentation can be extremely important. Useful records may include:
- Account statements from before the marriage
- Statements showing the balance on the date of the marriage
- Contribution records
- Employer records
- Tax documents
- Records of rollovers from earlier accounts
- Statements showing investment gains and losses
- Records of withdrawals or transfers
- Documents relating to previous divorces or property settlements
If an account has existed for decades, gathering this documentation may be difficult. In some cases, a forensic accountant or other financial professional may be needed to trace the separate property portion of the account.
How Is the Community Property Portion Divided?
Once the community property portion of a retirement account has been identified, the court must divide the marital estate in a manner that is considered “just and right.” That does not necessarily mean every asset is divided exactly 50/50.
For example, spouses may agree that one spouse will keep the entire 401(k) in exchange for the other spouse receiving marital assets of comparable value. They may agree to a settlement in which:
- One spouse keeps a $700,000 retirement account.
- The other spouse receives equity in the marital home.
- Other investment accounts are divided between the spouses.
- Business interests or other assets are used to balance the overall division of property.
This can sometimes be preferable to dividing every account down the middle. However, the parties need to compare assets based on their after-tax and actual economic value, not simply the numbers appearing on account statements.
A traditional 401(k), for example, generally contains pretax funds. The account’s stated balance is not necessarily the same as the amount the owner would ultimately have available to spend after taxes. The issue becomes particularly important when a divorce involves substantial investment accounts, executive compensation, stock options, business interests, or multiple retirement plans. A seasoned Austin divorce lawyer can guide you through the process and advise you of your rights and options related to property division during a divorce.
What Is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a special court order used to divide certain employer-sponsored retirement plans. The QDRO directs a retirement plan to recognize the former spouse’s right to receive a specified portion of the participant’s retirement benefits. In other words, a QDRO establishes a former spouse’s right to receive marital property interests from a retirement plan. A QDRO typically identifies:
- The retirement plan
- The participant
- The alternate payee, usually the former spouse
- The amount or percentage awarded
- How the award is calculated
- When the alternate payee can receive benefits
- Whether investment gains and losses are included
- What happens to survivor benefits, when applicable
The QDRO must also comply with the specific rules of the retirement plan. A divorce decree that says that one spouse receives “50% of the other spouse’s 401(k)” may not be sufficient by itself to transfer the money.
In addition, a QDRO can help you avoid situations where retirement account divisions are treated as an early withdrawal. Generally, distributions from qualified retirement plans before age 59½ may be subject to a 10% federal tax, in addition to ordinary income taxes.
There is an important exception to this rule for payments made to a spouse or former spouse under a QDRO. A qualifying QDRO distribution to a spouse or former spouse is not subject to the 10% early distribution tax.
A properly structured QDRO may allow the retirement plan to transfer the awarded amount of retirement benefits to the former spouse without treating it as an ordinary early withdrawal. The recipient may also be able to roll eligible funds into an IRA or another qualified retirement plan to preserve the tax-deferred status of the money. A skilled Austin divorce attorney can ensure that an appropriate QDRO is entered in your case to protect your interests.
How Defined Benefit Pensions Are Different
A 401(k) is considered a defined contribution plan. The account has an identifiable balance that changes based on contributions, investment performance, fees, and withdrawals. A traditional pension is different.
A defined benefit pension generally promises a future stream of payments rather than maintaining an account with a simple current balance. The value of a pension may depend on factors such as:
- Years of service
- Salary history
- Retirement age
- Benefit formulas
- Survivor benefits
- Cost-of-living adjustments
- Early retirement provisions
Determining the community portion of a pension account may require a specialized calculation rather than simply looking at an account statement. For high-value pensions, professional valuations can be extremely important. Our law firm works with experts to ensure that our clients’ financial interests are protected during a divorce.
How Are Military Retirement Accounts Divided?
Military retirement benefits have additional rules that make them different from ordinary 401(k)s, IRAs, and pensions. Under the Uniformed Services Former Spouses’ Protection Act (USFSPA), state courts may treat certain military retired pay as marital property or community property and divide it under applicable state law. However, a former spouse is not automatically entitled to a portion of military retired pay simply because the couple was married.
Military retirement division can involve issues such as:
- Years of military service during the marriage
- Years of service before or after the marriage
- Rank
- Retirement eligibility
- Disposable retired pay
- Cost-of-living adjustments
- Survivor benefits
- Disability-related benefits
Dividing military retirement benefits can be complicated, as they are subject to both state and federal law. An experienced Austin divorce lawyer can work with you to help you understand how any military retirement benefits may be divided based on the specific facts of your case.
Protect Your Retirement During an Austin Divorce
Your retirement savings may represent decades of work and may be one of the most important components of your financial future. Texas law provides a framework for determining which retirement benefits are subject to division, but applying those rules correctly can require detailed financial analysis and legal expertise. Our law firm can help you understand your rights related to the division of 401(k)s, IRAs, pensions, military retirement, and other retirement accounts during a Texas divorce.
The Law Office of Jason Wright can help you evaluate retirement assets as part of the larger marital estate and work toward a divorce agreement that protects your financial future. Our team tries to work out a settlement whenever possible, but remains ready to take your case to trial to protect your rights. To learn more or to schedule a consultation with an Austin divorce attorney, give us a call at 512-706-9662 or fill out our online contact form.