Dividing a 401k during property division proceedings

Many often question why a 401k would be subject to property division. In many cases, it is not the full value of the 401k that is at issue, but rather the contributions made during a couple’s marriage. Since those contributions come from marital income, according to the law they are marital property, as are any additional funds earned during that time.

In most cases, a divorcing wife can simply take the portion of the contributions that are due to her and roll them into her own retirement accounts. However, according to information shared by CNBC.com, divorce is one of the rare occasions where one can make a withdrawal from a retirement account early without incurring any penalties.

Understanding the trade-offs

With the concern over paying an early withdrawal penalty eliminated, one might think that pulling a portion of an ex-spouse’s 401k contributions out right now is a no-brainer. Yet there are trade-offs that come with such a decision. If those funds remain in a retirement account, one maximizes their income-earning potential by allowing them to accumulate interest and make gains through investments. Plus, even though it is not necessary to pay an early withdrawal penalty when pulling out such funds in a divorce, the individual does have to pay income taxes on the disbursement.

However, for people already approaching retirement age, the added money that may be available by allowing those funds to remain in a retirement account may not outweigh the benefits of having the money in hand right now.

For assistance with high-asset divorce, contact our Marietta family lawyers today.