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Dealing with a 401(k) in a divorce

On Behalf of | Aug 16, 2021 | Firm News |

Past posts on this blog touched upon the fact that a divorce in California impacts a couple’s retirement assets. One of the most common of such assets most have is a 401(k) account. As contributions made to a 401(k) during a marriage typically come from marital income, family courts view them as marital assets.

This requires, then, that both parties to a divorce understand how the court handles the division of 401(k) assets. The spouse contributing to a 401(k) may want to know whether keeping their full account is an option, while both spouses may also wonder whether they may cash out the portion of contributions coming to them.

Keeping one’s full 401(k)

According to information shared by the 401(k) Help Center, one can try to keep their full 401(k) in their divorce. That requires, however, the cooperation of their ex-spouse. More specifically, the non-contributing spouse must agree to forego their interest in the account. That likely requires that the contributing relinquish their stake in another marital asset comparable value. That may seem like a small sacrifice, yet one should consider that courts value retirement assets at their potential future value (after years of growth from investment returns and earned interest). This may require the contributing spouse to give up much more right now than they anticipate.

Cashing out 401(k) funds

Some may see 401(k) contributions coming from a divorce settlement as a potential source of immediate funds. Yet in most cases, cashing out tax-deferred retirement funds prior to reaching the age of retirement typically results in an early withdrawal penalty. However, according to Kiplinger’s Personal Finance, divorce is one of the few circumstances where one can cash out early without a penalty.


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