Pros and cons of cashing out a 401(k) during a divorce

On Behalf of | Jul 15, 2020 | Family Law

Like many of our past clients here at Spencer Law PLLC, you probably look forward to the upcoming conclusion of your divorce proceedings in Roanoke with both excitement and trepidation. Indeed, your relief is often counterbalanced by concerns about the uncertainty that the official dissolution of your marriage may bring. 

That uncertainty can be significant if you were not the primary income earner in your marital home. Spousal and/or child support may help to transition into this new phase of your life, yet faced with the prospect of finding new housing and potentially needing to secure vocational training (or return to school) in order to find gainful employment, you may feel like you need an immediate infusion of funds. 

Cashing out your portion of a 401(k) 

One source of such funds may be your ex-spouse’s 401(k), As contributions made to such an account during a marriage come from marital income, the court views them as marital assets. Thus, you may be due an equitable portion of those contributions. Yet you have likely heard that taking an early disbursement from a 401(k) nets a stiff penalty. 

While that is true in most situations, according to CBNC.com, divorce is one of the few instances where you can take a 401(k) disbursement without netting a penalty. 

What is best for you?  

Such an action may get you the money you need. Yet before taking it, you should consider the implications. Cashing out now denies you the chance to see that money grow through interest and investment returns. For example, with a rate of return of 6%, you could see your principal double in just 12 years. This demonstrates that your decision to cash out should consider how many years you are away from retirement. 

You can find more information on marital asset division throughout our site.