How to divide a 401(k)

Texas couples who are getting a divorce may wonder whether they need to divide one person's 401(k) and how to go about doing that. It is not possible to transfer a 401(k) to another person, but the assets in a 401(k) can be transferred in certain circumstances. It is important that this is done correctly so that neither person has to pay taxes.

It is necessary to create a document known as a qualified domestic relations order in order to transfer a portion of the 401(k) to the spouse. Usually, it goes straight into the spouse's IRA.

QDROs have other uses as well. If the person with 401(k) has to pay child support, that person can use a QDRO to transfer some or all of the 401(k) to a trustee or guardian of the child. Pension assets may also be assigned using a QDRO.

Property division can be a complex aspect of divorce. In Texas, a community property state, most assets and debts acquired after marriage are considered marital property with a few exceptions. Marital assets do not necessarily need to be divided 50/50. For example, a couple can negotiate an agreement so that one keeps an asset such as a retirement account and the other keeps the home. One possible advantage of such an arrangement is that it avoids the expense and complexity of creating a QDRO. However, in a decision like this, it is important that both people understand the legal and financial implications. The house might be costly if the mortgage is not paid off or in terms of taxes, utilities and upkeep. The retirement account could be valuable but its assets cannot be accessed without penalty until the owner reaches a certain age.

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