Retirement savings accounts like 401(k)s often carry emotional significance for the workers who fund them. They may view the account balance as an indicator of their personal responsibility, as they deferred short-term pleasures to contribute to the account throughout their professional career. The resources they have set aside also represent their source of financial stability after they eventually decide to retire.
The account that may make someone feel proud and secure throughout their marriage can become a source of anxiety and frustration if they decide to divorce. People are often intensely protective of their retirement resources. The idea of dividing the account, possibly by making an early withdrawal, can be rather upsetting to someone who has diligently saved for years.
What typically happens with retirement savings accounts when someone divorces in Texas?
An account could be vulnerable to division
Every marriage is different from the next, which is why property division rules provide guidance for people to interpret, not hard-and-fast specific requirements. What works for one couple could be unfair for another.
Some people enter a marriage with very clear financial protections in place. They sign a prenuptial agreement outlining what may happen with their property if they eventually divorce. Others sometimes sign postnuptial agreements during a marriage that may achieve a similar goal. Without a written agreement between the spouses, retirement resources are potentially at risk of division during a divorce.
When the courts decide what is marital property and what is separate property, the main consideration is what type of funds people used to develop their accounts. The amounts that people added to the account during the marriage are likely subject to division if they decide to divorce. The courts can order someone to actually split the account with a spouse. It is possible to do this using a qualified domestic relations order (QDRO) to avoid large penalties. Spouses who have not yet reached retirement age have to plan carefully to comply with established rules when dividing a 401(k).
Spouses can also consider the marital portion of the account balance when dividing other assets. Either solution can lead to a property division decree that conforms to the community property standards enforced in Texas.
Applying community property rules to high-value assets can be one of the biggest challenges during the property division process. Spouses who take the time to learn about what divorce may mean for different assets can use that information to plan for the best future possible after the process is complete.