Dealing with a 401(k) during a divorce
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Dealing with a 401(k) during a divorce

| Jul 3, 2020 | Firm News

Many of the couples going into divorce proceedings in San Diego likely anticipate having to deal with some complex financial issues; the division of a 401(k), however, might not be something they expecting needing to address. Yet given that the contributions made to such an account during a marriage come from marital income, family courts view them as marital assets. 

How, then, does the court equitably divide them during divorce proceedings? There are actually a number of ways to handle such a division. 

Keeping one’s full 401(k) 

The spouse contributing to the 401(k) may wish to retain the entire account for themselves (and thus limiting the impact of their divorce on their retirement plans). According to the 401(k) Help Center, they can do so by agreeing to relinquish their claim to a share of another marital asset of comparable value. Before people in such a position rush to push this option on their ex-spouses, they should consider its implications. The court values 401(k) funds at their potential future value. Therefore, while one might think they only have to give up on an asset valued at half of the contributions subject to division at their current value, they may actually stand to lose out on much more. 

Options available to the non-contributing spouse 

Typically, the court orders the funds owed to the non-contributing spouse rolled into their own retirement account (which may be either an existing account or a new account created by splitting the contributing spouse’s 401(k) account in two). One might question whether cashing out the portion owed to them is an option. Doing so before one reaches retirement age usually results in an early withdrawal penalty. Yet per information shared by SmartAsset.com, one can do this during a divorce without incurring a penalty.