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Dividing up the 401k during divorce proceedings

On Behalf of | Oct 29, 2019 | Property Division |

Many of those entering into their divorce proceedings in Houston do not anticipate having to include their 401k accounts as part of the process. Yet contributions made to such an account during one’s marriage come from marital income; thus, while the total value of the 401k may not be subject to property division, those contributions are. This prompts many to question how one is to divide the funds from a 401k if the account holder is not yet at the age of retirement.

Typically, an early withdrawal from a tax-deferred retirement account will invoke a penalty (which can be as much as 10 percent of the distribution). Yet per CBNC.com, divorce is one of those rare circumstances where such a withdrawal can be made without a penalty. The court hearing the divorce case issues a Qualified Domestic Relations Order, which authorizes a plan provider to make disbursements to an alternate payee (which in the case of a divorce is the non-contributing spouse).

Not being subject to the early withdrawal penalty means that a non-contributing spouse could actually withdraw the entire portion of the contributions owed to them right now. However, doing so forfeits the earning potential that those funds may present over time if left alone (plus, one would still have to pay income tax on any disbursements). The 401k Help Center suggests that rather than doing so, one might want to instead consider rolling those funds over into their own retirement accounts. Divorcing spouses whose 401ks are subject to division may also want to consider giving up their claim to another marital asset in order to retain the full value of their retirement account.