401k considerations during a divorce

On Behalf of | Mar 17, 2020 | Divorce

Although many people in Foster City may feel prepared going into their divorce proceedings, in reality many will encounter scenarios where they do not know what their best course of action may be. 

This is especially true when dealing with the division of marital assets. Many are surprised to discover that things such as their ex-spouse’s 401k (or at least the contributions made to it during their marriage) are subject to property division and thus are not ready when asked exactly how they would like their portions of those assets handled. 

Diving a 401k account 

The 401k Help Center provides some guidance in this area. Typically tax-deferred retirement savings plans are divided in a divorce. The court issues a Qualified Domestic Relations Order that authorizes a 401k plan sponsor to make distributions to an alternate payee. That usually means dividing up a 401k into two accounts, with the portion of contributions owed to the non-contributing going into the new account. This allows both parties to maintain control over their funds (and to set their own investment strategies). A non-contributing spouse can also choose to roll the portions owed to them into an existing retirement account, as well. 

Cashing out 

Some might wonder if cashing out the portion of marital 401k contributions owed to them is an option. In most cases, early withdrawals from a 401k account would result in an early withdrawal penalty of 10% of the disbursement amount. However, according to information shared by CNBC.com, a divorce is one of the few scenarios where an early withdrawal can be made without incurring a penalty (income tax will still be assessed on the disbursement). Those wishing to do this should have those desires specified in their QDRO.