We Listen. We Help. We Care.

Dealing with a 401(k) in a divorce

On Behalf of | Jul 28, 2020 | Divorce |

As people in Stamford begin to prepare for the property division portion of their divorce proceedings, the need to develop a strategy on how to divide a 401(k) becomes clear. As the contributions made to a 401(k) during a marriage come from marital income, family courts view them as marital assets, thus making them subject to division.

In such a scenario, both the contributing and non-contributing parties to a 401(k) need to understand what their options are. The contributing spouse should know whether fighting to retain the full value of their 401(k) is worth the effort, while the non-contributing spouse needs to know how to best handle the portion of the contributions coming to them.

Fighting to keep the full value of a 401(k)

Depending on how close they are to retirement, the contributing spouse may worry about how having to give up a portion of their 401(k) might impact their retirement plans. The 401(k) Help Center reports that one can try to retain the full amount of their retirement accounts by agreeing to relinquish their claim to a marital asset of equal value. Yet if one submits such a request, the court values the amount the non-contributing would forego at its potential future value (taking into account growth through investment returns and interest). Thus, the contributing spouse may have to give up more than they bargained for.

Cashing out 401(k) funds

In most cases, a court orders the equal division of 401(k) account funds between both parties. Yet if the non-contributing spouse feels as though they need a quick infusion of funds, they may look to cash out their portion. Early withdrawals from retirement accounts typically net a penalty, yet per SmartAssset.com, divorce is one of the few scenarios that permit such withdrawals free of any penalties.