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Handling a 401(k) during a divorce

On Behalf of | Mar 8, 2021 | property division | 0 comments

Past posts on this blog detailed many of the different aspects of marital property division, so much so that many may believe they know all there is to know about it going into their divorce proceedings in Texas. Yet many then find themselves surprised to learn that retirement assets (specifically 401(k) accounts) are also subject to property division.

Those contributing to a 401(k) account through their employment may question why the court deems such assets shared. The reason is due to the fact that contributions to a 401(k) made during a marriage come from shared assets.

Dividing up a 401(k) in a divorce

Upon learning of this fact, most then question how the court divides 401(k) accounts during divorce proceedings. Typically, the court issues an order which authorizes 401(k) plan providers to make disbursements to alternate payees. This then allows the providers to divide the accounts into two (with contributing and non-contributing spouses then assuming control of their respective funds). Many may wonder whether cashing out the 401(k) contributions due to them is an option. In most cases, an early withdrawal from a 401(k) account nets a tax penalty (often as much as 10% of the disbursement amount). Yet according to the website SmartAsset.com, divorce is one of the rare cases where early withdrawals from a 401(k) are not penalized.

Keeping one’s full 401(k) account

Those concerned that the division of their 401(k) will dramatically alter their retirement plans might question whether keeping the full amount of their accounts is a possibility. Per the 401(k) Help Center, it is, but only if the non-contributing spouse relinquishes their interest in it. For that to happen, one will likely have to give up their stake in a marital asset of comparable value.

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