Your Guide Through Challenging Times

Dealing with a 401(k) during divorce proceedings

On Behalf of | Jan 22, 2022 | Divorce, Property Division |

Many people go into their divorce proceedings in California believing that they know what to expect. yet almost inevitably, those same people find themselves surprised to learn that certain aspects (marital property division, in particular) come as a complete shock to them.

One of the lesser-known aspects of property division is the treatment of retirement assets (such as a 401(k) account). Most assume that since their 401(k) typically results from their own individual employment that the court classifies such an asset as separate property. Yet due to the fact that contributions from a 401(k) during a marriage come from marital income, the court considers them to be marital assets.

Dividing up a 401(k)

Upon learning this, divorcing spouses usually want to know how the court divides such a fund. The court typically issues a Qualified Domestic Relations Order authorizing a 401(k) plan provider to make a disbursement to an alternate payee. This allows the provider to then divide the original fund and create two new accounts (with each spouse then assuming control over their respective account).

Some may question whether the option of cashing the portion of a 401(k) due to them is an option. Under normal circumstances, an early withdrawal results in a hefty tax penalty (usually 10% of the disbursement amount). However, according to information shared by CNBC.com, divorce falls among the few cases where early withdrawals are not penalized.

Keeping the full fund

401(k) account holders may have concerns over how losing any portion of those funds might impact their retirement plans. This may prompt them to wonder if keeping their full account is an option. Per the 401(k) Help Center, it is. However, to do so, one has to convince their ex-spouse to forego their stake in it. This likely requires that they must relinquish their interest in another marital asset in exchange.