Dealing with your portion of a 401(k) in a divorce

On Behalf of | Dec 29, 2020 | Firm News

While most people might assume that the conclusion of your divorce proceedings in California brings with it a great deal of relief, the fact is that you might also view it with a certain amount of trepidation. This is particularly true if you were not the primary income earner in your marital home, as you now face financial uncertainty without your ex-spouse’s income to rely on.

Many in your same situation come to us here at Laughlin Legal, PC concerned about how they will be able to handle the financial transition into their post-divorce lives. Just as it was for them, the news that alimony is not automatic in your divorce case may come as quite a shock to you. How, then, are you to afford the immediate costs of securing housing or vocational training?

Cashing out your portion of your ex-spouse’s 401(k)

One potential source of immediate financial assistance that often goes overlooked is your ex-spouse’s 401(k). The court defines any contributions made to that account during your marriage as shared assets. Normally taking an early disbursement from a tax-deferred retirement accounts nets a penalty. Yet according to the website, you can do so during a divorce without facing any penalties.

Weighing the pros and cons

That does not mean, however, that there are no potential drawbacks to this decision. You must pay income tax on any disbursement you do take. Cashing out those funds right now also eliminates the potential for them to grow (from earned interest and investment returns) from now until you reach the age of retirement. You should thus consider the advantages and disadvantages of this decision before committing to it.

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