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How can you divide up your 401k in a divorce?

On Behalf of | May 27, 2019 | Asset Division

When making a mental inventory of the assets you expect to be included in your property division proceedings in Cranberry Township, you likely failed to include your 401k. Remember that the money used to fund your 401k comes largely from your income, which makes any contributions made to your account during your marriage subject to property division. Yet how can you share assets from your 401k with your ex-spouse without having to deal with those hefty early withdrawal penalties? 

You could always try to avoid altogether having your 401k included amongst your marital assets. According to the 401k Help Center, the way to do this is to approach your ex-spouse with the proposal of your relinquishing your claim to a marital asset provided that they give up their interest in your 401k. This may work to their advantage if there is a certain marital asset they cover, yet be aware that the potential of added income earned from interest from their own 401k account may prompt them to reject such an idea. 

If they insist on collecting their portion of your 401k contributions, you can disperse them in one of two ways. The first would be to roll their portion into their own retirement account. This would afford them the aforementioned benefit of earning interest on those funds. The other would be for them to cash out their portion in a single lump sum. Whereas such an action would normally invoke an early withdrawal penalty (if you have to reach the age of retirement), divorce is one of the few situations where you can withdraw from a 401k account without a penalty. Income tax must be paid on the dispersal, however. Thus, you should ensure that your agreement stipulates that your ex-spouse shoulders that expense should they withdraw their portion. 

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