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Should you withdraw your portion of a 401k account?

Your divorce may signal a welcomed end to the hostility and tension that currently exists between you and your spouse. However, if you were not the primary income earner in your marital home, it can also bring with it a great deal of uncertainty about the future.

You may find yourself needing to go back to school, pay for vocational training, or having to find a new home or apartment. Spousal and child support assistance may help with some of that, but not all of it. Might you also want to consider cashing the portion of your ex-spouse’s 401k that’s owed to you?

401k contributions are marital assets

The news that you are even entitled to a portion of those funds may come as a shock to you (after all, they are the result of your spouse’s individual employment). However, the income that your spouse earned during your marriage is a marital asset. As the contributions made to their 401k came (as least partly) from that income, the court considers that shared property as well.

Cashing out without incurring a penalty

Typically, withdrawing funds from a tax-deferred retirement account prior to actually reaching the age of retirement would result in a tax penalty (often 10% of the disbursement amount). Yet according to the website, the court can stipulate (through a Qualified Domestic Relations Order) that disbursements go to an alternate payee (you) without penalty (you would still have to pay income tax on whatever money you received).

Yet this is not a decision you should rush into. Rolling those funds over into your own retirement account (so that they can continue to grow through investments and interest) is also an option. You need to decide if the benefit of having the money now exceeds that potential future wealth.