People with a 401 (k) may consider taking money from their accounts for many reasons. Struggling to make ends meets during the COVID-19 pandemic is one reason. Another reason is that they’ve separated from their spouse and need the funds to survive.
A 401 (k) is a defined contribution plan where employees contribute funds each year to a retirement plan. The employer may provide matching amounts. The advantage of a 401 (k) is that you don’t have to pay taxes on the income until you withdraw the money. Often, withdrawing money later in life means you’re in a lower tax bracket than when you contributed, so you save on federal taxes by postponing the withdrawal.
In Texas, all property acquired during the marriage is considered marital property unless there is a pre-nuptial agreement or a post-nuptial agreement. Marital property does not include property either spouse owned before the marriage. Marital property does not include property acquired during the marriage if the parcel was obtained – by a gift, through a will or estate when someone dies. Marital property doesn’t include a personal injury recovery unless the recovery is for loss or earnings (while the accident victim was married).
Marital property does not depend on how the property is titled – individually or jointly. Marital property includes real property, personal property, and bank accounts. It also includes 401 (k)s and other retirement accounts. In addition, marital property includes your debts – mortgages, personal loans, and other obligations.
Does separation affect what property is considered marital property in Texas?
No. Texas does not recognize the legal concept of separation. Essentially, either you’re married, or you’re not – even if you and your spouse live in separate locations. All property acquired after spouses separate is still considered marital property – up to the time the divorce proceedings start.
In Texas, your marital property is divided equitably. Equitably doesn’t always mean 50-50. Many factors, such as the age of the spouses and the spouse’s financial situation, are considered.
So, what does this mean for the money you withdraw from the 401 (k) while you’re separated but not divorced? It means you’ll have to return some (an equitable share) of the withdrawal amount to your spouse as part of the resolution of the divorce. You may be able to trade off your equitable share for other assets that your spouse owes you – but, in terms of the dollar amount, you’ll have to reimburse your spouse for some about ½ of the money you took.
How is a 401 (k) divided in a divorce?
Whether your money is considered separate property or marital property depends on when the money is deposited into the 401 (k) account. Many workers set up automatic withdraws from their paycheck to fund their 401 (k).
Splitting a 401 (k) is onerous, especially if some of the contributions were made before you were married. Payments from a 401 (k) to someone who is not the title-owner (such as another spouse) require a formal “Qualified Domestic Relationship Order (QDRO) signed by the family law judge. The QDRO details how the 401 (k) be divided, to whom, and when. It’s critical that you work with an experienced family law lawyer and Judge so that the QDRO is prepared and executed correctly.
If you’re struggling financially after your separation, there are a few ways an experienced family lawyer can help you:
First, you can begin divorce proceedings to provide an end date on what property is considered marital property. That way, any contributions you make to your 401 (k) after the divorce starts – you should be able to keep. However, until the divorce ends with a final order, you must keep in mind contributions continue to be community property. This is why it is important to pursue a divorce in a timely fashion when ever possible, or at a minimum obtain a final settlement partitioning property.
You can reach an agreement before the divorce regarding how you will divide some or all of your marital property.
You ou can file for temporary alimony – but only after you file for divorce. Temporary alimony is an award of spousal support while the divorce proceedings are pending. If you need the money to support your children, you can file for temporary child support if you also file to determine which parent will have physical custody of your children.
Talk to a premier Austin family lawyer now. You don’t need to wait until you’re ready to file divorce papers before you speak with a divorce lawyer. You can talk with a family attorney at any time. At Lyttle Law Firm, our Austin and San Marcos family lawyers help you understand your financial rights when your marriage is ending. We have the experience and resources to help guide you through these difficult times. We represent spouses and parents who live in Travis, Hays, Comal, Williamson, Bell, Caldwell, Burnett, Llano, and Guadalupe Counties. Contact us at 512.215.5225 or complete our online form to schedule an appointment.