Couples seeking divorce often wonder how 401(k) assets are split. Texas is one of the states that follows community property standards, meaning the 401(k) is legally viewed as joint property owned by both people. In these cases, the court will generally split the 401(k) equally. While this is straightforward, community property standards mean the 401(k) is split regardless of who earned it.
Most other states do not follow community property standards, choosing instead to follow equitable distribution rules. Equitable distribution means the judge is given the freedom to split the 401(k) assets however he or she feels is fair. In some cases, the judge does not decide to split the 401(k) equally. Instead, the judge looks at contributions each spouse made to the 401(k) plan after they were married to determine the marital portion and then divides it based on factors such as the account balance and each spouse’s financial situation. However, the judge may not divide the 401(k) in a way each spouse considers fair.
Some couples choose to make these decisions instead of leaving it up to the court. Divorcing spouses are able to negotiate between themselves to come up with a personalized plan to divide the 401(k). This takes the deciding power away from the court and puts it in the couple’s hands instead. These plans are called marital settlement agreements or divorce settlements, and they can be a more favorable arrangement than simply following community property or equitable distribution standards.
Couples should always include their attorneys when drafting any agreement to ensure that each spouse is properly represented. An attorney with experience in divorce law may be able to negotiate a divorce settlement that his or her client feels is more fair than what the courts would decide.