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Cashing out 401(k) funds in a divorce

On Behalf of | Aug 19, 2020 | Divorce

For many of those in Manassas going through a divorce, the process will inevitably bring them a good deal of relief from no longer having to deal with the tension associated with their marriages. At the same time, they may also face some uncertainty if they were not the primary income earners in their marital homes. Suddenly they face the prospect of having to secure gainful employment (which could require them to return to school or secure additional vocational training) or even finding new housing.

Spousal support may provide some relief, yet such assistance is not guaranteed (and still may not provide one with the immediate infusion of funds they need). One other option that many often overlook is the amount due to them from their ex-spouse’s 401(k).

Cashing out a portion of a 401(k)

Because the contributions made to a 401(k) during a marriage come from marital assets, family courts view them as shared funds. Thus, those contributions may be subject to equitable division. One might think that cashing out the portion of those funds due to them would net an early withdrawal penalty (which can be as much as 10% of the disbursement amount). In most scenarios, that would be true, yet according to the website, divorce presents one of the few scenarios where taking an early withdrawal does not result in a penalty.

Rolling 401(k) funds over into a new account

However, by choosing to cash out those funds now, one gives up on the potential growth they could experience if left alone (which could ultimately earn one much more). It is for this reason that the 401(k) Help Center reports that typically in a divorce case, the plan provider divides the account in two an rolls the portion due to the non-contributing spouse into the second account (over which they have control).


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