In a divorce there are typically three main concerns for our clients. First and foremost are the kids, and understandably so. Second is the division of the assets the parties own now. Last, but certainly not least, are assets owned now that the parties will depend on in the future—retirement benefits. These “future benefits” are the topic of today’s discussion.
Retirement benefits can accrue in several ways, but all have one thing in common: they are community property in Texas. That means, that the benefits, whether in the form of 401(k), pension, Teacher Retirement System, Municipal Employee Retirement System, or any other retirement vehicle is subject to division in a divorce. Here are four simple rules to help you plan for the division of the retirement assets:
- The benefits do not belong to the employee; they belong to the community estate. Example: Husband works for Big Company, Inc. for 18 years and has accrued significant retirement in the company’s 401(k) over that time while Wife has worked some smaller jobs and has accrued no significant retirement. Texas presumes that the parties agreed to this arrangement as part of their marriage relationship, and that both parties would be happy to someday retire and use these community assets, the 401(k), in their retirement together. Therefore when the parties divorce, Texas presumes that splitting the retirement assets is fair to both parties. Conversely, Texas does not deem it fair that Husband should keep “his” retirement in the divorce leaving Wife to struggle along without a share of it. It just wouldn’t be fair.
- Only the portion of the retirement benefits that accrued during the marriage are divided. Example: Wife works for Defense Contractor Inc. for 3 years and accrues benefits the whole time. Then she marries Husband, and the two stay married 12 years during which time Wife continues to work for Defense Cont. Inc., and continues to accrue retirement funds in the company’s 401(k). The parties then divorce, and Wife continues to work for the company for several more years before she retires. Husband’s fair share comes from the 12 years he was married to Wife until the date of divorce. He doesn’t get a piece of what she earned before the marriage or what she earned after. Those portions are her separate property.
- Not all assets are created equally. For example, a 401(k) or 403(b) can be easily divided at as part of the divorce. A pension or other type of annuity is not as easy or immediate. For example, if Wife is awarded 50% of Husband’s 401(k), that portion can be partitioned from his share right away, and Wife could turn it into cash if she so required (there are severe tax consequences of converting a tax deferred retirement account into cash!), or she could roll it into an IRA for her own retirement. However, Wife would only start receiving her share of the Husband’s pension when he retires, and that would come as a percent of his monthly pension payments, not a lump sum. So pension is not equal to 401(k) in terms of accessibility or immediate cash.
- The retirement is accruing in real time. When we divide up a retirement account at a divorce, many clients feel as though their spouses are taking half of their retirement. That is not the case. The retirement belonged to both spouses the whole time of marriage. So it’s not that Wife is now taking half of something that used to belong solely to Husband. No, she is taking her half of an account that she always had a ½ ownership interest in. When Husband got his first paycheck, and the check stub showed he had $122 in Year-To-Date retirement, $61 of that was Wife’s right then, and likewise on each successive paycheck. So she is not getting something of Husband’s at the time of divorce; she is taking what was hers all along when she gets her half.
An important sub-point to this rule is that since benefits are accruing in real time, the longer the parties are married the more retirement is accrued. So if a party anticipates working ten more years, but is holding off on filing a divorce, then when he or she finally does file for the divorce two years later, then the other spouse is entitled to two more years’ worth of retirement benefits, and the working spouse only has eight years of work left after the divorce to rebuild the retirement account. Filing two years earlier would have saved the working spouse thousands or tens of thousands of dollars. (For more logistical considerations before filing for divorce, see here.)
What can you do to save your retirement?
Negotiate. As stated above, not all assets are created equally. For example, if the parties have significant equity in the marital home, perhaps Wife can keep the whole house in exchange for taking a smaller share of Husband’s retirement. Thus she keeps a bigger share of one community asset while he keeps a bigger share of another community asset. In cases where a spouse has both a pension and a 401(k), perhaps he will take a larger share of the 401(k) while she keeps more of the pension since it pays out later.
The negotiation over the possible shares and offsets in property that can make for a fair division is where creative lawyers excel because there is no requirement of a dollar for dollar exchange. For example, if Wife really wants to keep the house, she may agree to let Husband keep all of his retirement in exchange for letting her keep the house even though the retirement may eventually be worth more. In this example, the value the Wife put on the house outweighed the value the Wife put on the retirement account. If Wife thinks that’s a fair deal, and Husband agrees, then the court will likely approve the deal, and it’s a win-win for the parties.
Youngblood Law, PLLC is a Fort Worth, Texas family law firm that uses a holistic approach to help people get through family law problems and beyond. This essay is intended for educational use only, and is not a replacement for competent legal counsel. If you are facing a family law matter, we recommend obtaining competent legal counsel like Youngblood Law, PLLC. For more information contact us at 817-601-5345, find us on the web at www.youngblood-law.com, or on your mobile device, open your browser and type in lawfw.biz and press Go.
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