At the time of divorce, savings, investment, or retirement accounts (including 401k, pension, and IRA accounts) may be in one spouse’s name or in both spouses’ names. But the name on the savings account, brokerage account, investment account, or retirement account does not determine the ownership or proper division of the funds held in these accounts. Instead, ownership and proper division of the funds will generally be determined by factors such as whether some or all of the funds in the accounts were contributed during the marriage, or if some of the funds were contributed before the parties were married.
If the spouses live in a community property state (as opposed to an equitable distribution/common law property state), and if funds owned by one spouse were placed in an account before the marriage, and more funds were added to the account during the marriage, this commingling of separate and community property may make it necessary for the parties to hire a financial expert to determine ownership of the funds in the account. For example, interest earned and dividends paid on the separate property funds in such an account during the marriage may be community property rather than separate property. Community property states generally include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In other states—so-called equitable distribution or common law property states—the divorce court attempts to divide the spouses’ assets equitably (fairly) and may consider a spouse’s separate property in deciding to make an unequal division of the spouses’ marital property.
In practice, the difference between the division of assets in community property states and in equitable distribution states is sometimes not as great as it may seem, as the court in a community property state may have the discretion to divide the spouses’ community property on a 60-40, 70-30, or other unequal basis.
When evaluating the division of investment or retirement accounts in divorce, it is also important to consider any tax implications for the division of the accounts.
In Texas, a community property state, the division of savings, investment, or retirement accounts in a divorce does not solely depend on whose name is on the account. Instead, it is based on whether the funds were contributed during the marriage (community property) or before the marriage (separate property). If both separate and community funds are commingled in an account, a financial expert may be needed to determine the ownership of the funds. Interest and dividends earned on separate property during the marriage are typically considered community property. Texas courts generally divide community property equally, but they have the discretion to order an unequal division if deemed just and right. It is also crucial to consider tax implications when dividing investment or retirement accounts in a divorce.
