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Dividing up a 401k

Most in Essex County will go into divorce proceedings anticipating that they will have to relinquish complete ownership of certain assets. One particular asset whose inclusion in property division proceedings often takes people by surprise is a 401k. A 401k is viewed by most as being an individual retirement account; why, then, would it be considered marital property? One must remember that the funds contributed to a 401k are taken from their salary. As salary earned while married is viewed as marital property, so too are the contributions made to a 401k in that time. 

When the issue of dividing up 401k contributions comes up during divorce proceedings, the court will grant a Qualified Domestic Relations Order. This authorizes a retirement account administrator to allow disbursements to be made to an alternate payee. Once a QDRO has been granted, there a several ways that the non-contributing spouse can access their portion. According to the website, the most common include: 

  • Rolling their portion into an IRA: Doing this saves both spouses from any tax penalties that would normally be assessed when withdrawing funds from a 401k prior to the age of retirement. 
  • Deferring payments until the contributing spouse retires: This may assure the non-contributing spouse a reliable additional source of income during their retirement years. 
  • Cashing out their portion: Cashing out their portion of the 401k gives the non-contributing spouse their money now, yet also will leave them facing stiff tax penalties. 

For those contributing spouses who do not want to see their 401k funds diminished, the 401k Help Center offers up a different solution: relinquishing the claim of ownership of another marital asset in order to retain full ownership of the 401k. 

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