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Dealing with a 401(k) in a divorce

On Behalf of | Apr 16, 2021 | Family Law

Couples heading into divorce proceedings in Virginia likely understand that they face several highly complex tasks as they work their way through the process. One such step that they may not anticipate, however, is having to determine how to divide up a 401(k).

Most people view a 401(k) as an individual account (as it typically comes as a benefit of one’s employment). Yet the contributions made to a 401(k) during a marriage come from marital income (thus making them shared assets). Once a couple understands this, the next question then becomes how does the court divide such an asset during property division proceedings.

Keeping one’s full 401(k)

Typically, the court mandates that a 401(k) plan sponsor divide up the funds subject to division into two separate accounts (with each respective party then assuming investment control over their individual accounts). However, the spouse contributing to the 401(k) through their salary may wish to try to keep the full amount. According to the 401(k) Help Center, this is an option, but only if they can convince their ex-spouse to forego their stake in the asset. To do this, one likely needs to agree to give up their interest in another marital asset of comparable value in exchange.

Cashing out one’s portion of a 401(k)

One or both sides to a divorce may also wonder whether cashing out the portion of 401(k) contributions due to them is an option. In most circumstances, taking an early withdrawal from a tax-deferred retirement savings account nets a tax penalty (usually 10% of the disbursement amount). However, per, divorce is one of the few cases where such a penalty is not assessed (one must still income tax on the disbursement). This may provide one with a needed infusion of funds in the immediate aftermath of their divorce.