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Withdrawing from a 401(k) during a divorce

On Behalf of | Jun 23, 2020 | Firm News |

While a divorce is certainly a difficult process, it may bring with it a great deal of relief to many in Germantown. Yet even if one experiences relief at the dissolution of their marriage, they may also feel trepidation about their future. This is especially true for those who were not the primary income earners in their marital homes. 

People in this situation may find themselves in need of immediate funds to help pay to return to school or receive vocational training, or they may need money to put down on a new house or apartment. While their divorce settlements may provide them with some degree of spousal support, those funds may not be immediately available for them to use. Another option, then, would be to make a withdrawal from a 401(k). 

Taking a 401(k) disbursement 

The contributions one’s ex-spouse made to their 401(k) during their marriage are marital assets. Thus, those funds are subject to property division. Usually, the 401(k) plan provider will divide the account into two accounts, with the funds due to the non-contributing spouse then rolling into their own account. However, either spouse also has the option of taking a distribution now. This will typically result in a 10% early withdrawal penalty. However, according to, divorce is one of the few scenarios where such a penalty is not applied (although the disbursement is subject to income tax). 

Making the right decision 

Given the lack of a penalty, one might immediately believe cashing out their 401(k) funds now to be their best option. However, doing so means walking away from any future growth those funds might allow for. Per the Motley Fool, that return may be as much as 9-10% annually (for stocks). Therefore, one should thoughtfully weigh the pros and cons before taking a disbursement. 

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