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Dealing with a 401(k) in a divorce

On Behalf of | Nov 2, 2020 | High-net Worth Divorce |

Property division proceedings can often be the most complex (and contentious) portion of a divorce case in California. This is often due to the fact that much disagreement may exist over what actually qualifies as a marital asset. 

One asset in particular that may spark debate is one’s 401(k). A retiree-to-be has likely worked for years contributing to such an account (thus potentially making it one of their more valuable assets). Yet when the contributions made to a 401(k) come from shared income, the court typically considers them to be marital assets. 

Dividing up 401(k) contributions equally

The division of funds from a retirement account may seem a difficult proposition given the tax implications. Yet in a divorce case, the court may issue a Qualified Domestic Relations Order. According to the website SmartAsset.com, a QDRO allows for the disbursement of 401(k) funds without them being subject to early withdrawal penalties. Both parties then may do with those funds what they deem fit. The spouse contributing to the account may wish their portion to remain in it, while the non-contributing spouse may elect to roll theirs into a new or existing 401(k) or individual retirement account. Cashing out one’s portion of the disbursement is also an option (although whoever chooses to do so must pay income tax on the disbursement). 

Keeping the full 401(k)

The contributing spouse may that losing any portion of their 401(k) will have a dramatic impact on their retirement plans (particularly if they are close to retirement age). The 401(k) Help Center states that if one wishes to do so, they may try to retain the full amount of their 401(k) in their divorce. To accomplish this, they will likely need to relinquish their claim to a marital asset of comparable value.