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Handling a 401(k) in a divorce

| Jun 9, 2020 | high-asset divorce |

Most people in Houston come into their property division proceedings prepared to have to discuss the division of a wide range of assets. Even so, many are still surprised to learn that their 401(k)’s (or at least a portion of them) are subject to division.

401(k) contributions made during one’s marriage come from marital income, thus making them marital assets. There are a number of ways that a divorcing couple can choose to divide (or otherwise deal with) such funds.

Dividing up the 401(k)

The most common method is to simply divide the 401(k) contributions that are subject to division. In many cases, the divorcing couple chooses to split the original 401(k) account into two separate accounts, allowing each to manage their own investment strategies. If the non-contributing spouse already has their own retirement savings account in place, they can also elect to simply roll over the portion of funds into it. Then there is the option of one (or both) sides cashing out their shares. Typically this will result in an early withdrawal penalty, yet according to CNBC.com, divorce is one of the few cases where one can do make a pre-retirement withdrawal without penalty.

Keeping the full 401(k)

The contributing spouse also has the option of trying to keep their full 401(k). To do this, the 401(k) Help Center says that they typically will have to relinquish their interest in an equally valuable marital asset. This may or may not be advantageous to them. Their 401(k) valuation is not what it is currently worth, but rather its potential future value (meaning they may have to give up more than they expect). However, if they are close to retirement age, any future growth may be minimal.

You have worked hard saving for retirement. It’s important to receive all the funds you are entitled to in your divorce so you can start your new life off on the right foot.