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Dealing with a 401k during property division proceedings

On Behalf of | Feb 25, 2020 | Property Division

Many of the different types of assets that are subject to property division proceedings in Peabody have been referenced on this blog in the past. Yet one asset that both parties to a divorce case may not anticipate being included is a 401k account. The funds that go into such an account typically come as the result of only one spouse’s efforts; why then would such an asset be considered marital property? The income that one earns while married is a marital asset, and as at least a portion of the contributions made to a 401k come from that income, those contributions are considered shared.

This then prompts another question: how can such assets be divided? Typically if one makes a withdrawal from a tax-deferred retirement account prior to actually reaching the age of retirement, they are required to pay a penalty (which can be up to 10% of the amount withdrawn). However, per information shared by CNBC.com, divorce is one of the rare circumstances where early withdrawals can be made from a 401k without incurring that penalty. This may come as good news to one who is needing a quick infusion of cash in the wake of their divorce.

Yet cashing out one’s portion of a 401k during divorce proceedings is typically not the most common way to divide this asset. The 401k Help Center reports that in many cases, the 401k account is split, with both sides being then granted ownership over their respective portions. This allows both the freedom to determine the investment strategies of the funds therein, and to contribute to grow the accounts through contributions. In such a scenario, however, special arrangements must be made to settle any liabilities pending against the account (such as an outstanding loan).