Dealing with a 401(k) in a divorce

On Behalf of | Jul 6, 2021 | Divorce

Many of those going into divorce proceedings in Michigan may believe themselves completely prepared for what lies ahead of them. Yet most express surprise to learn that certain assets (often assumed to be individual properties) are actually marital property.

Among these are 401(k) accounts. Contributions made to a 401(k) during a marriage come from marital income. This makes them marital assets (and thus subject to equitable division). Upon learning this, most of those dealing with it then want to know how the court divides such an asset during a divorce case.

Dividing up a 401(k)

In most cases, the court issues a Qualified Domestic Relations Order that authorizes a 401(k) plan provider to make disbursements to an alternate payee (in the case of a divorce, this would be the non-contributing spouse). The provider then divides the original plan in two, with each party in the divorce case assuming their own individual account.

Some may wonder whether they can cash out whatever portion of a 401(k) may be due to them. Under normal circumstances, this would result in an early withdrawal penalty (as much as 10% of the disbursement amount). Yet according to information shared by CNBC.com, divorce is one of the few cases where an early withdrawal does not result in penalties (one will still have to pay income tax on the disbursement).

Keeping the full 401(k)

401(k) plan holders may worry that dividing up their accounts might drastically alter their retirement plans. Per the 401(k) Help Center, one might address this concern by attempting to keep their full 401(k) in their divorce. To do this, however, they need to convince their ex-spouse to relinquish their stake in it. Doing this likely requires that they forego their interest in another marital asset of comparable value in exchange.

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