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Dividing A 401K Plan

Dividing a 401(k) plan in a Texas divorce involves a Qualified Domestic Relations Order (QDRO). A QDRO is a legal document that outlines how the 401(k) plan will be divided between the spouses while complying with federal and state laws. These are the usual steps to divide a 401(k) plan in a Texas divorce:

  1. Identify and Value the 401(k) Plan: Determine the value of the 401(k) plan as of a specific date, which is often the date of the divorce or a date agreed upon by the spouses. The plan administrator or the financial institution managing the 401(k) can provide the necessary information.
  2. Classification: Determine whether the 401(k) is community property (acquired during the marriage) or separate property (acquired before the marriage or through inheritance or gift). In Texas, only community property is subject to division in a divorce.
  3. Draft a QDRO: Work with an attorney to draft a QDRO that specifies the terms of the division. The QDRO should include the following:
    • The names and addresses of both spouses.
    • The name of the plan and the account number.
    • The specific terms of the division, such as the percentage or dollar amount each spouse will receive.
    • The timing of the distribution, which can be immediate or deferred until the plan participant retires or another specified event occurs.
    • Details regarding survivor benefits or beneficiary designations, if applicable.
    • Information about tax consequences and the responsibility for any taxes and penalties related to the distribution.
  4. Submit to Plan Administrator: The QDRO is sent to the plan administrator or financial institution that manages the 401(k) plan. They will review and implement the order.
  5. Distribution of Funds: The 401(k) funds will be distributed according to the terms specified in the QDRO. This may involve creating a separate account for the non-participant spouse or transferring funds to an existing account.
  6. Tax Considerations: Be aware of the potential tax consequences of a 401(k) distribution. Depending on how the funds are distributed, there may be income tax and, in some cases, early withdrawal penalties. Consult with a tax professional for guidance.

It's essential to work with an experienced family law attorney who is knowledgeable about QDROs and retirement account division in a divorce.

If you have questions, we have answers.

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