Cashing out your portion of a 401(k)

On Behalf of | Nov 2, 2020 | Family Law |

Divorce can bring with it a certain amount of financial uncertainty (especially if you were not the primary income earner in your marital home in North Carolina). There are measures in place to help you cope with that (e.g., spousal support and maintenance), yet such assistance often may not address any immediate needs you may have. 

Many in this situation come to us here at The Law Office of Geoffrey A. Planer wondering where they might turn to for funds. If you share the same question, one source that you may consider is your ex-spouse’s 401(k). 

Early withdrawals from a 401(k) account

This may immediately give you pause as you know that early withdrawals from a tax-deferred retirement account are typically penalized (in the case of a 401(k), that penalty can be as much as 10% of the disbursement amount). Yet according to the website, divorce presents a unique situation. During your property division proceedings, the court will typically issue a Qualified Domestic Relations Order. With a QDRO in hand, a 401(k) plan sponsor can make payments to an alternate payee (in this case, you). Given the special circumstances, a withdrawal would not net a penalty. 

Weighing your options

Before you jump into the decision to cash out the portion of your ex-spouse’s 401(k) assets owed to you, however, you should first consider the ramifications. Leaving those funds in your own retirement account allows them to grow through interest and investment returns. Should you still be years away from retirement, that growth could be substantial. And while you can make a withdrawal without penalty, you will have to pay income tax on whatever you receive. These are points to ponder in determining whether cashing out now is truly the right decision. 

You can learn more about marital property division by continuing to explore our site.