Marriage, Financial Planning, and Your 401(k) Rollover

My Today’s Alerts series highlights ideas generated in my divorce financial advisory practice.

Kate* called to let me know that she’d decided to leave her company, AFD, Inc., to pay attention to her start-up business full time. She wanted to make a clean break so she planned to add the 401(k) to her existing IRA right away.

Kate had been working for AFD for ten years, during which time she married the love of her life, Mark.

I suggested to Kate that she open a new IRA account instead of adding the 401(k) rollover to her existing IRA account. Why? Because her existing IRA, property owned before she married, is her separate property. Her 401(k), however, is both marital and non-marital.

Up until the date of marriage, Kate’s 401(k) balance was separate property. In our state of Texas, a community property state, Kate’s 401(k) contributions after the date of marriage and the “income” generated by the account are community property. In fact, the “income” on her existing IRA is community property as well. “Income” has its own meaning under Texas law which it is, broadly, interest and dividends paid by the investments in the account.

Here’s the information Kate and I gathered before she rolled over her 401(k) to her new IRA.

  1. Value of the 401(k) as of the date of marriage and each annual statement for the 401k since
  2. Annual contributions (including any company match) since the date of marriage
  3. Earnings including interest, dividends and growth since the date of marriage

Seems like financial planning overkill? Think again. First, gathering this information now is easy.  It will be much more difficult (and costly!) to find or calculate many years from now after she rolls the account to an IRA, and especially if she combines her IRAs.  Second, you are probably thinking the same as Kate.  Kate said, “But I’m not thinking about getting divorced”.  Just because you make a financial planning move with divorce in mind, it doesn’t mean you are planning to divorce.  (As a parallel, just because you buy homeowner’s insurance doesn’t mean you planning for someone to set your house on fire.) Lastly, Kate will have the burden to prove her own separate property. If she can’t, the assumption is that the property is community property.

Before or during marriage, you have options to avoid some of these complications. Married couples can use a pre or post- nuptial agreement to “opt out” of or alter laws like the Texas rule that states that “income” from separate property belongs to the community.  Whether you totally opt out or just scale back the definition, the agreement should reflect your financial goals as a couple.  This is particularly useful if you both enter marriage with sizable investment or retirement accounts or even a businesses or real estate investments.

Remember that family law (and the interpretation of the law) in divorce is the “base line”.  In divorce, couples can negotiate and agree to a different method of division.  A Certified Divorce Financial Analyst™ can help you find the options that work in your case.  For example, if the balance at the date of marriage was relatively small, you could use the date of marriage value and divide the remaining balance of the account with your spouse.  Or, you could use the date of marriage value and have a CDFA™ or CPA grow that balance up until the date of divorce at a rate the couple can agree to use.

The last, and most costly, option is to have a CPA or CDFA “trace” all the “income” e.g. earnings for the account – interest, dividends and growth. Then it’s up to the attorneys or judge to interpret the legal code and come to a final decision as to the separate property portion of the retirement account.

But I want to get back to Kate, who isn’t even considering divorce. By keeping as much information as possible before she moves her 401(k) account, Kate has taken a step to protect herself from a downside scenario – the potential cost of a divorce.  Documentation is good asset protection and great financial planning.

Robertson Stephens Wealth Management and Divorce Planning of Austin work with clients and their attorneys to help insure that financial accounts are allocated or divided in the most efficient manner possible. Please contact Pam Friedman, CFP®, CDFAat

Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. This material is for general informational purposes only and is not tailored to the needs of any specific individual.  Any discussion of U.S. tax matters should not be construed as tax-related advice. Please consult your personal tax advisor for more information. © 2020 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.

*This is a hypothetical example. It does not illustrate any investment products and does not show past or future results.