How Divorce Divides Investment Plans

During a divorce, retirement and investment plans are frequently secondary concerns. What to do with children, the house, cars, and spousal support are the first things that come to people's minds as soon as they hear the word 'divorce'. Investment plans, however, are sometimes the largest assets that a husband or wife has when they begin divorce proceedings.

There is a tendency to think of investment plans as immune from divorce proceedings because the person working has been the one building and growing those investment plans, but this is not the case. A court will divide assets in investment plans between spouses just as any other piece of property in a divorce. If you are involved in a divorce, and you would like to learn more about how Texas courts divide investments and retirement plans, a Houston divorce attorney offers the expertise and experience you need to make the best decision.

Important Facts about Divorces and Investment Plans

The first step you should take is to differentiate your defined contribution plans and your defined benefit plans. Defined contribution plans are those for which you, your employer, or both of you contribute a set amount each year. The benefits that defined contribution plans pay out depend upon the amount that goes into your account. Examples of such plans include Individual Retirement Accounts (IRAs) and 401(k)s.

On the other hand, under defined benefit plans, employers promise to pay you a certain amount of money based on a formula. An example of this is a pension plan. In the private sector, only the employer contributes money to the pension plan, and the employer pays the employee a set amount upon retirement based on factors such as past earnings and length of service. A Houston property division attorney can help you distinguish the types of retirement plans and act accordingly.

Two of the reasons why it is important to know the difference between investment plans are:

• If you wish to reach a settlement with your spouse in a divorce, it is important to value your investment plans. A defined benefit plan may not actually pay any benefits for years or decades, but it still holds value and should be included in any equitable divorce settlement. The non-working spouse will not receive payments from a pension plan until the working spouse begins receiving pension payments.


• Depending on the type of investment, a couple may need to use a Qualified Domestic Relations Order (QDRO) to receive payments from someone else's investment account. Particularly for defined contribution plans, QDROs are a legal means to change investment plan payouts. Otherwise, someone's employer has no legal obligations to direct payment to anyone but the plan's owner. If properly used, QDROs incur no early withdrawal fees from the IRS. Without them, however, if a couple transfers money from a retirement account that required a QDRO, the owner will face penalties.

Texas is a community property state, which means that a Texas family law court will consider all property acquired during marriage as community property. In a divorce, the court will divide all community property. This includes 401(k) deposits and 401(k) growth that occurred in the time between marriage and divorce. Valuing and splitting investment and retirement plans are costly and complicated decisions in a divorce. If you would like more information about handling investment plans and divorce, contact a Houston property division lawyer at John K. Grubb & Associates, PC.