How Divorce Affects Your Retirement
Because Texas is a community property state, all income earned during a marriage is considered community property and is subject to a “just and right” division at the time of divorce. Income earned includes money that saved in retirement plans such as pensions, IRA’s, and 401(k)’s. Upon divorce your retirement plan you may be required to share a portion of the retirement income earned during the marriage with your spouse.
Benefits that are paid by the employer to the employee through defined contribution plan (ex. 401(k) plan) are not considered gratuitous. Instead, they are viewed as additional compensation an employee would earn at a job and therefore the amount earned through an employee contribution plan will be classified as community property upon divorce.
If you have a defined benefit plan, upon divorce, the amount of the plan to be classified as community property will depend on the number of years with the employer and an average of the employee’s highest earned monthly salaries. The numbers used to calculate the payout for the non-contributing spouse are frozen at the time of divorce. Therefore, an increase in salary after the divorce will not be considered when calculating the payout at the time of divorce.
Disability Payments
If an injury occurred during the marriage that results in the payment of long-term disability benefits, the disability payments are considered community property. The disability benefits can be from the employer of the spouse or from an insurance policy bought with community funds.
Military disability benefits and social security disability payments are governed by federal law, not state law. Therefore, any payment that is awarded to a spouse for disability from military service or social security will not be subject to community property laws at the time of divorce.
Worker’s compensation payments made during marriage are treated as community property. The injuries resulting in workers’ compensation payments before or after the marriage are considered the separate property of the injured spouse.
To learn more about how your retirement assets may be affected during your divorce, call on our Texas attorneys.