Dividing up a 401K in a divorce

On Behalf of | Jan 10, 2020 | Divorce |

One typically goes into divorce proceedings in Spring Hill understanding that they will be required to divide many of their personal assets with their soon-to-be ex-spouse. Yet one asset they may not yet be prepared to part with is a portion of their 401K. Many people view 401K accounts as separate property (given that they typically come as a result of their individual employment). Yet since contributions to such an account made during a marriage come from shared income, they are thus considered to be marital assets. 

There are a number of different options available when it comes to dispersing out a portion of one’s 401K during a divorce. The most common is for the non-contributing spouse to take the portion owed to them and simply roll it over into their own retirement account. One also has the option to cash out the portion owed to them in a single lump sum right now. Typically this will result in an early withdrawal penalty. Yet according to information shared by CNBC.com, divorce is one of the few cases where an early withdrawal can be made from a 401K account without accruing a penalty (one will still have to pay income tax on the dispersal amount, however). 

If the spouse that has been contributing to the 401K wants to retain the entire amount of the account, the 401K Help Center points out a way to make this possible. They would simply need to relinquish their claim to another marital asset of comparable value. Those considering this option should remember, however, that when doing so, their 401K is valued at its future value, not its current amount. This could mean that they will be forced to give up more than they might have bargained for.