When divorcing (Texas) and spouse has 401K but we have a loan out, can the 401K still be split?
L D asked:
The 401K has a loan. Will the court make the loan be repaid before making a settlement?
settlement loan
The 401K has a loan. Will the court make the loan be repaid before making a settlement?
settlement loan
settlement loan
Yes, the loan will need to be paid and the assets split.
However, if they do not go into a qualified tax deffered account income taxes will be due.
settlement loan
Of course! You will both need to split equally repaying the loan amount or just get half of the 401(k) minus the loan amount.
settlement loan
In Texas, community debts, like community property, are divided by the court on a “just and right” basis. A divorce decree cannot rewrite a mortgage or loan agreement, however. If, for example, the judge decides the husband must pay a certain loan but the loan was taken in both parties’ names, the creditor will usually look to the wife to pay if the husband does not or cannot repay the loan.
In Texas, employee benefits earned during the marriage, including most pensions and 401K plans, are community property that will be also be divided on a just and right basis.
Regarding your last question, I don’t see why the divorce decree cannot divide the 401K assets before you pay off the loan. Whether you can access the money, however, depends on your loan agreement. The divorce decree does not affect your loan agreement.
settlement loan
a 401k loan is an asset of the plan and a debt for the individual participant. The 401k can still be split but the directions to do so must be explicitly stated in the Qualified Domestic Relations Order. Typically the loan stays with the participant as that’s who the loan documents are with. If the entire balance goes to the AP then the loan generally does not go with it. But if it’s to be a fair split, then for the split to occur it should be done so not including the loan balance and then tack the loan on. As an example: If there is $25,000 in the account balance that does not include a $5,000 loan then you would split the account $17,500, including the loan balance goes to the participant and $12,500 goes to the alternate payee. If you don’t do it that way you could end up with a split of $15,000 each and the participant gets the loan and his/her balance is really $10k versus the $15k the spouse gets….not fair. Of course outside assets can be used to balance this out too.