Cashing out your portion of a 401(k) in a divorce

| Jan 21, 2021 | Divorce

The completion of your divorce proceedings in Minnesota may signal an end to the tension and hostility that permeated your marriage towards its end. It may, however, also prompt a slight degree of trepidation on your part if you were not the primary income earner in your marital home. You may face the need for immediate funds to secure vocational training or additional schooling in preparation to return to the workforce, or you may even need to find new housing.

Most in this same situation come to us here at the Dittrich Law Firm, P.A. thinking that alimony will meet this immediate financial need. Yet the court may not award alimony in your case. As the court contemplated whether or not to do so, a more reliable source of instant funds may be your ex-spouse’s 401(k).

Dividing up a 401(k) in a divorce

Contributions made to a 401(k) during a divorce come from marital income (thus making them marital assets). The court typically mandates that a 401(k) plan sponsor divides the account into two distinct funds (with both you and your ex-spouse then assuming control over your respective accounts.

However, you may consider cashing out your portion of the 401(k). In most situations, this would result in a hefty tax penalty. Yet according to CNBC.com, divorce is one of the few scenarios where an early withdrawal from a 401(k) is not penalized.

Weighing the pros and cons of cashing out

Before you commit to this course of action, however, you should consider the long-term financial ramifications. Pulling that money out now means that you give up the potential growth it may experience from interest and investment returns. This amount could be significant if you are still several years from retirement.

You can find more information on dividing marital assets throughout our site.