Community Property and Solo 401k Retirement Plans

Key Points

  • There are two systems of state property law. While most states use the common law system, the community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. Alaska has adopted an optional community property system.
  • Community property is everything a husband and wife own together. This includes all money earned and property acquired during the marriage.
  • For community property rules to apply, an individual must have two things; a valid marriage and a domicile in a community property state. The words “residence” and “domicile” do not mean the same thing. A person may have several places of residence, but only one domicile. Domicile is based on where the person intends their permanent home to be. For example, an individual who is on a temporary work assignment that takes him from New York to California for a few months would most likely not be considered domiciled in California. On the other hand, if the individual retires and moves to California, she would be considered domiciled in California.
  • Community property rules can determine who gets a solo 401k retirement plan at death or after a divorce.
  • It is recommended that Solo 401k owners get a spouse’s written consent when naming someone else as the beneficiary of their solo 401k when community property rules apply.
  • The U.S. Supreme Court ruled in the Boggs v. Boggs, 520 U.S. 833 (1997) court case that when there are conflicting claims, ERISA trumps community property law. The Boggs case has been cited as precedent by many other courts.
  • When a spouse has been determined to have a community property interest in the company solo 401k plan benefits of the other spouse, a qualified domestic relations order (QDRO) is necessary to direct the payment of those benefits after a divorce.

In sum, in common law states, each spouse is a separate individual with separate legal and property rights. In community property states, the underlying theory is very different. Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. In community property states, each spouse typically shares equally in profits and income. In essence, each spouse owns a half interest in all community property, regardless of which spouse actually acquired the community property.

How are solo 401k retirement plans affected?

Assets held in a solo 401k plan will be community property to the extent that contributions were made to the account and earnings accrue during the marriage.

When are community property issues likely to arise with solo 401k retirement plans?

There are two significant times when community property rules will mix with solo 401k retirement plan rules. For solo 401k owners in community property states, when it comes to determining who gets the retirement plan at death or after a divorce, community property rules will come into play.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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