Dealing with a 401k during a divorce

The property division process can easily become contentious. Oftentimes, parties to a divorce in Wilmington may not completely comprehend why certain assets would be considered marital property, and this can lead to discord. One such asset is a 401k. Those who contribute to a 401k may wonder why such a benefit (which is due to their own individual efforts), would be a shared asset. On top of that, they may have concerns that if a portion of their 401k is withdrawn to give to their former spouse (prior to either reaching the age of retirement), they may be forced to pay a tax penalty.

When addressing the first question, one should consider where 401k contributions come from. A portion is taken from one’s salary; the remainder is often made through matching contributions from their employer. The money earned from salary during a marriage is considered marital property. It should not be viewed as a surprise, then, that given that 401k contributions come from that money that they would be considered marital assets.

Typically, early withdrawals from a 401k prompt a tax penalty (which can often be as high as 10 percent). However, divorce presents a special case. According to information shared by CNBC, when a court issues a Qualified Domestic Relations Order in a divorce case, the alternate payee of a retirement account (in this case, the non-contributing spouse) can withdraw their funds without being penalized.

For those who wish to retain the total value of their 401k’s, the 401k Help Center suggests a potential solution: relinquish their claims in a marital asset of equal value on the condition that their ex-spouse give up their share in the 401k.