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401(k) division during a divorce

On Behalf of | Jul 16, 2020 | High-asset Divorce

Divorce brings with it the need to divide up a number of marital assets; many people in Louisville, however, may not know that a 401(k) ranks among them. Even though one’s 401(k) typically comes through their individual employer (leading most people to assume that such an account is a separate asset), contributions made to it during their marriage come from marital income. That makes those specific contributions marital assets. 

Divorcing couples have a number of different options for dividing up a 401(k) during a divorce, each with their own advantages and disadvantages. Which would be best in a particular case depends on the unique situation of each party involved. 

Splitting a 401(k) in two 

The most common course of action is typically for the divorce court to issue a Qualified Domestic Relations Order, which (among its many functions) authorizes a 401(k) plan provider to issue a disbursement to an alternate payee (other than the account holder). This paves the way to divide the 401(k) in question in two, allowing each party to a divorce to then assume control of their own assets. 

While taking an early disbursement from a 401(k) typically results in an early withdrawal penalty, one can (according to CNBC.com) cash out their portion during a divorce without incurring it. This may net one a needed immediate infusion of cash, but they forego the potential growth that money might experience over the years. 

Keeping the full 401(k) 

The 401(k) Help Center also states that one can try to retain their full 401(k) by relinquishing their claim to another marital asset of comparable value. Such an action allows one to avoid a greater impact on their retirement plans, yet could force them to give up more than they realize (such as their stake in their marital home).