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Dividing up a 401(k) in a divorce

On Behalf of | Dec 14, 2020 | Divorce |

As people in Florida enter into their divorce proceedings, it benefits them to know what they may face in order to avoid having to reassess their strategies and goals midway through the process. One area that often presents the potential for unanticipated challenges is marital property division, specifically the division of retirement account assets. 

Many people often express surprise at learning that their 401(k) accounts are subject to property division. Yet the court views contributions made to such a fund during a marriage as marital assets given that they come from marital income. This leaves those individuals facing the potential of having their 401(k) accounts divided questioning how to best manage the process. 

Options for the non-contributing spouse

During a divorce or upon the entry of a Final Judgment of Dissolution of marriage, the court may issue Qualified Domestic Relations Orders  (QDRO). The QDRO permits a 401(k) plan provider to make a disbursement to a payee other than the account holder (in this case, the alternate payee would be the non-contributing spouse). This allows for the division of an original 401(k) account into two new accounts (with each spouse then having control over their respective accounts). 

Often non-contributing spouses due to receive 40(k) funds question whether they can cash out their portions. Typically this would result in an early withdrawal penalty, yet according to CNBC.com, such an action during divorce proceedings does not result in penalties, however the non-contributing spouse will need to pay taxes on the portion cashed out .

Can one keep their full 401(k)?

For those hoping to keep their full 401(k) in their divorce, the 401(k) Help Center points out that may indeed be an option. To do so, however, one must convince their soon-to-be ex-spouse to relinquish their stake in the account. This will likely require one foregoing their interest in another marital asset of comparable value in exchange.