401k division during divorce proceedings

On Behalf of | May 17, 2020 | Family Law

Divorcing couples in Tucson must deal with a number of financial considerations when determining the division of their marital property. One that may (at least initially) appear to present to most complications is the division of a 401k. While typically only one spouse holds a 401k (and the funds from such an account typically come from their own individual efforts), the contributions made to it during the marriage (since they come from shared income) are marital assets. 

The assumption is that a 401k is off-limits prior to the account holder reaching the age of retirement. However, divorce presents a unique scenario, and thus regular tax restrictions related to a 401k do not apply. 

Dividing a 401k between divorcing couples 

Indeed, according to information shared by the website SmartAsset.com, one or both parties to a divorce can choose to cash out the portion of a 401k subject to property division owed to them without incurring an early withdrawal penalty (they would still owe income tax on the disbursement). Doing this may help those who are in immediate need of funds following their divorces; the trade-off, however, is that they lose the earnings potential that money presents. 

A divorcing couple can also choose to divide a 401k account into two separate accounts (with both sides being able to control the investment strategies of their respective accounts going forward). If the non-contributing spouse already has their own retirement account in place, they can also choose to roll the funds owed to them into that account. 

Retaining one’s full 401k 

The 401k Help Center offers another potential solution: the account holders retaining its full value. To do so, they would need to give up their interest in another marital asset of equal value in exchange for their spouse relinquishing their stake in the 401k.