Property division can be one of the most complicated aspects of a divorce. Yet the principle behind this portion of divorce proceedings seems fairly simple: each party to a divorce retains their separate property, while the court divides their marital property equitably.
The word “equitably” becomes complex when considering retirement assets such as a 401(k). A 401(k) holder may not view their account as a shared asset, but given that contributions to such an account come from marital income, they come under the purview of property division. So how does the court divide such an account?
Equitably dividing a 401(k)
Typically, the court issues a Qualified Domestic Relations Order that empowers a 401(k) plan provider to make a disbursement to an alternate payee. With such an order in place, the provider can then divide the assets subject to division equally, with both portions usually then rolling into separate accounts.
However, the contributing spouse may worry that dividing their account may derail their retirement plans. This could prompt them to question whether keeping their full is an option. Per the 401(k) Help Center, one can do this, but only if their ex-spouse agrees to forego their portion. This will likely require that the contributing spouse relinquish their claim to another marital asset of comparable value.
Cashing out early
Both sides of a divorce may also find themselves in need of immediate funds. Thus, they may question whether they may cash out the portion of 401(k) coming to them. Typically pulling out funds early from a retirement account nets an early withdrawal penalty. Yet according to information shared by CNBC.com, divorce is one of the few cases where early withdrawals are not penalized. They will, however, have to pay income tax on the disbursement.