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Determining whether to cash out 401(k) funds in your divorce

On Behalf of | Apr 21, 2021 | Divorce

Past posts on this blog touched upon the fact that retirement assets (such as a 401(k) account) become subject to property division in your divorce. Yet when you find yourself in need of immediate funds (for expenses such as new housing, schooling or vocational training), is there a way such assets can benefit you? 

Such is the question often posed to us here at White & White, Attorneys at Law. The common school of thought is that the assistance you need will come from spousal support. Yet such an award is not automatic. You may be able to take funds from any retirement assets due to you in a divorce; such a decision, however, deserves a good deal of thought.  

Cashing out your portion of a 401(k)

When dividing retirement assets, the court typically issues a Qualified Domestic Relations Order authorizing a 401(k) plan sponsor to divide an account into two. Most might tell you cashing out is not an option without having to accept an early withdrawal penalty. Yet according to the website, divorce is one of the few circumstances where early withdrawals are not penalized. Thus, whatever portion of 401(k) funds due to you could provide you with the immediate infusion of funds you need.  

Considering the drawbacks of cashing out

The decision to cash out, however, is not one to rush into. First, you need to understand that you will have to pay income tax in your disbursement. On top of that, you sacrifice the potential growth those funds may generate should you leave them alone until you reach retirement age. Depending on how far away you are from retirement, that amount may or may not be significant.  

You can learn more about complex property division issues such as this by continuing to explore our site.