Unlock Your Employer-Based 401(k) while stilll Employed
Texas Sized Benefits for Married Couples living in Community Property States
I was attending a local Austin multi-family meetup recently and after the meeting I got to talking to a local attorney who discussed a unique way in Texas for married couples that have employer-based 401(k)s to gain access to those funds and re-direct them (via Self Directed IRAs) into other investment choices such as real estate, while still being employed. He had my attention! As a syndicator of large apartment communities, I have a growing investor base that have significant wealth tied up in their 401(k)s but feel trapped in limited investment choices and high administrative fees. They’d like to participate more in the alternative real estate investments such a multi-family apartments that have a history of solid returns and a bright future based on demographic trends and supply and demand factors.
When I left my corporate job, one of the exciting things I was looking forward to after 18 years with the company was to gain access to my decent sized 401(k) and move some of those funds into a self-directed IRA. During my tenure I had written the Treasury group several emails on everything from giving us more investment choices to liberating the rules around gaining more access to move funds out of the 401(k). I simply felt my funds were held hostage to a limited number of stock and bond only options and increasingly expensive plan administration fees.
This attorney mentioned to me that you could gain access to your employer based 401(k) and move funds into a self-directed account while still working at your current employer through a concept called partitioning of spousal assets. In layman’s terms, this attorney would file a request in local court to partition your communal assets – specifically your employer-based 401(k) and only applicable for married couples living in Texas where he practices – a community property state. However, he has researched this in some other community property states in WA, CA and AZ and found it would work. He believes this should be available in all the community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Once court approval was granted, you’d present this approval document to your employer and the laws are such that the employer would have to allow you the opportunity to gain access to up to 90% of your 401(k) assets and then you could move them to your spouse’s self-directed IRA. You cannot move them to your self-directed IRA, but only to your spouse’s IRA. Once the assets are there you can then have access to a much larger set of investor choices including direct real estate investments.
All IRA rules continue to apply and please review with your accountant and attorney, but this appears to be a viable way for the millions of married couples in the state of Texas to be liberated from their employer’s 401(k) plan administrator while still maintaining employment at their current job. This is an attractive option for many couples where there are sizeable 401(k) assets and one feels they can only gain access if they quit employment. Now, access can be granted while remaining with your employer.
Do your due diligence, but here is what the attorney, Henry Novak, furnished me on how the process works at a high level. If you live in a community property state other than Texas, Henry said he would be willing to discuss with your attorney in your community property state to educate them on his approach. Here's a summary how the process works in Texas.
Partition of Retirement Plan Benefits by Texas Residents – by Henry Novak
If you’re a married Texas resident who works for a private employer or a state, county or city agency that offers a 401(k) or other retirement plan in which you participate, you and your spouse can transfer money out of that retirement plan and into a self–directed IRA without incurring any income tax consequences. From this IRA a broad range of self–directed investment opportunities are then available. In Texas, all benefits contributed to or paid into a married person’s retirement plan are community property to which both spouses have an equal claim under Texas community property law. The Texas Family Code, which codifies Texas marital property law, specifically allows a married couple to divide their community property between them in whatever percentages they desire. This is done by entering into a written “partition agreement” that dissolves the community property and creates two separate property estates, each owned by the individual spouses as their respective “separate property”. Each spouse then has full control over the use and disposition of his/her separate property. Retirement plan benefits can be partitioned in this manner. The partition process takes place as follows:
1. I prepare a partition agreement for signature by the husband and wife that partitions only the retirement plan benefits – all other marital property retains its status as community property.
2. As much as 90% of the plan benefits can be partitioned to the non-participating spouse as his/her separate property.
3. I submit the partition agreement to a Texas state district court and ask the court to enter an order directing the administrator of the retirement plan to divide the plan benefits in accordance with the percentages set forth in the partition agreement.
4. Each plan administrator requires a specific form be used for court orders that partition plan benefits. I will prepare the court order using the form provided by your retirement plan and will submit the proposed order to your plan administrator for pre-approval.
5. After the plan administrator has approved the proposed order, I will present the order to the court for signature. A certified copy of the signed order is then forwarded to the plan administrator for implementation of the partition agreement.
6. The plan administrator will then create a separate account for the benefit of the non–participating spouse and will transfer the percentage of plan benefits set forth in the court order into that account. The benefits/assets transferred into that account will be the separate property of the non–participating spouse and the remaining balance of plan benefits will be the separate property of the participating spouse.
7. The plan benefits partitioned to the non–participating spouse and then transferred (“rolled over”) to the custodian of a self-directed IRA in the name of the non-participating spouse, from which a multitude of self–directed investments can be made. The rollover does not trigger a taxable event; i.e., there is no early withdrawal penalty and no income tax is paid on the rollover. As with all traditional IRA’s, no income tax is paid on earnings accumulated in the IRA until money is withdrawn.
Photo Credits - Making a financial plan image by Allen Stoner from Fotolia.com