Dividing a 401k in a divorce

While many people in Shelton go into divorce proceedings believing that they know everything as to what to expect, there will inevitably be some issues that will take them by surprise. For many, learning that one’s 401k account is subject to marital property division falls into this category. While it is true that such funds typically come solely through the employment efforts of one spouse, contributions to a 401k account made during a marriage are drawn from marital income. Learning that a portion of one’s 401k is owed to their ex-spouse (and conversely, learning that one is entitled to a portion of those funds) raises the following inevitable question: how can a 401k account be divided? 

Per the 401k Help Center, the common way to divide such an account in a divorce is to either roll the portion owed to the non-contributing spouse into their own retirement account, or simply divide up the current 401k into two separate accounts. In either scenario, both parties are able to control the investment strategies and decisions of their respective accounts, and both become eligible to receive disbursements when they reach the age of retirement. 

Some might question whether or not the non-contributing spouse can simply cash out the portion of a 401k’s funds owed to them right now. Typically early withdrawals from a 401k result in a tax penalty (which can be as much as 10% of the disbursement amount). However, information shared by CNBC.com shows that divorce is one of the few cases where a withdrawal can be made without incurring any penalty. This might benefit those in need of a quick infusion of funds in the wake of their divorce proceedings. It should be noted, however, that income taxes will still be owed on the disbursement amount.