Dividing a 401(k) plan during your divorce could be frustrating for you, especially if you’ve been working hard to save for retirement. Your goal may have been to retire early or to have enough to support yourself and your spouse in old age, but getting a divorce put an end to that goal.
Now, you need to determine how to divide the plan fairly. Dividing a 401(k) plan is tricky, and if you don’t do it right, you could end up costing yourself or your ex more money in the long term.
How does Texas divide retirement assets?
Texas is a community property state. As a result, any part of a 401(k) retirement plan earned while two people are married becomes property of both people. That means that you need to determine how much of the retirement was earned and saved prior to marriage and how much was earned and saved after.
On top of that, the interest earned on the money during the marriage, no matter when that money was deposited, may also be considered as community property. You’ll also have to calculate this interest to determine how much there is to split.
To get the right amount of interest and an amount to divide between you, what an attorney or accountant usually does is determines the total value of the 401(k) plan at the time of the divorce and subtracts the premarital value of the 401(k) from that total. This isn’t always a perfect science, though. If there is inflation or a loan was taken out on the 401(k), then those factors have to be considered as well.
Is it worth buying out your spouse?
One option you may be interested in is buying out your spouse’s share of the retirement account. This may be more likely if your spouse is looking for more liquid funds, which is something you may want to negotiate with them.
If you decide to stick with dividing the 401(k), you will need to get a court order to do it. Without one, you could end up paying taxes or other penalties for the distribution, so it’s something you’ll need to address with the judge.